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What is the first reaction you got from your clients and from your investor base over the Budget? Did they think the Budget has ticked all the boxes?
I would say that over a period of time, you know, from the market standpoint, Budget has become less of an event and rightly so. That is how it should be. We do not want to see a Budget creating market volatility all the time. Obviously, it has some stock specific impact as such. By and large, it is quite well received that the government has resisted the temptation to go populist in a pre-election year, had stayed the course very much on fiscal deficit reduction and that the borrowing programme appears reasonable.
The government assumptions on revenue etc appear to be quite reasonable. The most positive and the biggest single, positive surprise has been the big focus on the capex growth of 24% on an adjusted basis. That is a pretty robust number to look at. So, yes, given the tight situation that we have been in, it is a Budget that has been quite well balanced and has ticked the boxes in terms of what could have been done.
Obviously, it is coming at the cost of something else. One cannot have fiscal consolidation, a 24% capex growth without costing anything. And the cost is that the non capex part of the government expenditure has grown by only 2% on a year-on-year basis, which will probably be a sentimental dampener for those expecting a big rural push, etc.
There is one standout loser and that is the insurance sector. As an institutional research brokerage firm, what is your view on the Indian insurance sector going forward considering that India is now moving into a new tax regime? Insurance has been an instrument of choice for tax savers also and going forward will that change?
Over a period of time, we have seen the government doing step by step reducing the tax incentives and reducing the number of instruments and the number of choices that we have to manage personal tax rates. What has happened in insurance is one more step in that direction.
It all started off with the change in definition of long term in the case of debt securites;, then there was some short-term capital gains tax on equities and some long-term capital gains tax on equities and so on. My sense is that this is a step in that direction and to the extent, the finance minister has also compensated a little bit by reducing the tax rate at the bottom end but at the top end as well.These are compensating factors from a broader perspective. For insurance companies, these high-ticket investment oriented items were about 10 to 20% of the total AP for different companies and so there is going to be some hit on that.
Although we are still awaiting other clarification in terms of whether even the returns from the high ticket investments become taxable, whether they are eligible for the usual indexation benefit, etc. or not. But having said that, yes, there is going to be a one-time impact on insurance growth and to some extent, stock prices are reflecting that. But I feel that it is more like a one-time impact. I do not think it really changes the trajectory of growth of the insurance market.
What is really happening in the current market environment and all the news flow around the Adani group now that the FPO was called back last night? Is it an event which is of global interest and in that sense, an image builder for India this way or that?
I look at it from the stock market’s point of view. The group has come out with some clarification in terms of the exposure to the various state-owned banking systems and the private banking system. has come out with its own disclosure; some of the other banks have come out with their own disclosures as well. The way I look at it, that it is not really a systemic risk for the Indian banking or the financial system. Basically, it should not be viewed as a risk for the system as a whole.
Getting back to the Budget, in your note, you have talked about how the Budget clearly stands to benefit the rural play as those companies will do good because of the capex push. There is going to be the infra theme, which the market already has caught on and continues to favour as well. If you were to draw an analogy in terms of stock market sectors and stocks which stand to benefit or become even dearer after the Budget, what will the list be like?
Clearly there are two very clear beneficiaries. One is obviously the capex-related plays with obvious push coming from the central government which was more or better than what we were expecting. I also want to highlight that which is outside the central government budget but I believe that going forward in FY24 and beyond, the other two segments of the capex driver which are the state governments and also the private sector, are also likely to pick up.
Over the last couple of years, the state governments have been dragging their capex spends but now the fiscal deficit and the debt to GDP ratio for the state governments is very close to the pre-pandemic level. Basically, fiscal deficit is back to pre-pandemic level. The debt to GDP ratio is slightly higher but not way higher. That paves the way for the states to up the capex game going forward.
We are seeing some initial signs of the private sector capex also building up. My sense is that in addition to the central government effort, there are these other two drivers which makes the scenario quite optimistic for investment-related plays, particularly the contracting and the capex and the infra sector plays as such so that is clearly one beneficiary.
The second beneficiary is also the tobacco stocks because the tax increase has been quite modest and my sense is that given that we are now out of the purview of the GST compensation bit, it means that the next tax event for tobacco is now 16 months away.
You have spoken about the public sector banks with respect to Adani. From the DIPAM secretary yesterday, we tried hard to figure out what could happen with the smaller banks, but could not get much of an answer. What is the market expecting?
Before that, I want to clarify on the previous point on the tobacco taxation. There is a 16% increase in NCCD and NCCD itself is only 10% of the total tobacco taxation. So effectively, we are talking about a 2- 3% increase in tobacco taxation, which is quite a positive development from my perspective.
Therefore, I want to make it clear that tobacco taxation has been quite benign and should be seen quite favourably.
To your other point on the state-owned banks, their valuations are looking pretty attractive. It has gotten better over the last few days and there have been some concerns on the asset quality as such. But my sense as I mentioned in one of the previous answers as well is that I do not think we are going to get into any NPL cycle so to speak. The credit growth outlook looks pretty reasonable, 14-15% should be the number to be looking forward to.
I continue to believe that the provisioning costs will continue to trend down. Some of the larger state-owned banks appear to be quite interesting at this point in time.
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