Budget Expectation, earnings growth pushed | Trade Nivesh

Trade Nivesh We feel that the fiscal target for FY21 will be prepared with more flexibility with growth as the main theme of the budget.




The market's expectation for Budget 2020 is solid given the government's vision to push the slowing economy, support industries, increase cash in hand of common-man and increase rural income to boost consumption.


After the corporate rate cut, focus now will be to lower the direct income tax of households. The market also expects sector-specific goodies for segments such as auto, infra, realty, aquaculture and housing.


Scrappage policy is expected for auto, which may be announced outside the Budget while the future focus will be on electric vehicles (EVs).


Infra spending is already announced at Rs 105 lakh crore expenditure for the next five years, which is more than double the Rs 52 lakh crore spent over the past six years. The market's confidence in achieving this spending will depend on the fiscal position and prudent long-term plan. The market will access the government’s consolidated financial statement, practicality and implementation of the forecast.

The market may be a bit inspective given the fudging of the past two years of budgeting while real performance was sluggish. But at the same time, it is commendable that the government understood the gap and announced corrective and supportive measures to improve the situation. Hence, the market expects that this time the Budget plan will be in-line with ground reality and productive plans for the future.

Regarding the fiscal target, the actual number for FY20 will be very different than the 3.3 percent announced in the past Budget. The economy fell considerably to sub-5 percent from more than 7 percent forecast, revenue from the tax is much below and additional fiscal incentives were provided with cut in corporate tax to bring some growth in the economy.

These are all known and factored in the market, and we feel that the market may not be impacted even if the fiscal number comes as low as 3.6 percent to 3.8 percent. For this number, a lot will depend on the government’s control of Q4FY20 expenditure and relay in payment.

The government is likely to raise the escape clause of Fiscal Responsibility and Budget Management (FRBM) and stay within the 0.5 percent limit allowed in extraordinary years. It is required to support the economy and spend more on FY20-21. We feel that the fiscal target for FY21 will be prepared with more flexibility with growth as the main theme of the Budget.

The start to Q3 result is good and in-line with the expectations. Nifty index earnings are expected to grow by more than 20 percent on a year-on-year (YoY) basis due to low base of last year, cut in corporate tax and growth in the banking sector on account of fall in provision and NPAs.

The FMCG sector is likely to see robust growth due to lower cost and demand supported by normal monsoon. The oil & gas sector is likely to be mixed with good numbers from oil marketing companies while a mute performance from exploration.

The IT sector is likely to be flattish on account of slowdown in banking and global demand. On the other hand, sectors such as auto, metals, telecom and others will be negative to flat with mild improvement on a quarter-on-quarter (QoQ) basis. In overall, Q3 is likely to provide a push to the earnings growth trajectory of FY20 and 21.

The market has still held-on to the major gains, trading at new range, though consumer inflation bounced to a six-year high, at 7.35 percent on month-on-month (MoM) basis. CPI is much above the Reserve Bank of India’s comfort range, losing hope that rate cuts will resume in the near-term.

The market feels that a large part of the sudden hike in inflation is due to a sudden one-time increase in prices of specific food items and oil which will subside in the next two to three months and not impact the long-term trend, as indicated in WPI low manufacturing data.

While RBI has cut rates by 135 bps, a large portion of which is yet to be transmitted in banks’ lending rate. This is expected to happen post-Budget and will help re-steady government financials.

The market may get a bit careful after the solid pre-Budget rally of Nifty which is up 2 percent, Nifty Mid-cap by 7 percent and Nifty Small-cap by 11 percent, on MoM basis. To take further direction the market may want to see more of the ongoing Q3 results, given the marginally higher non-performing assets (NPAs) in recent bank results and actual Budget outcome.

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