Market hopes for budget while outlook for earnings forecast has slowed…


Geopolitical tensions in the Middle East due to US and Iran standoff had triggered a sudden spurt in oil prices which impacted Indian market in the short-term. But recently it has eased a bit due to concern over slowing global growth, trade-war and uncertainties over OPEC decisions which is helping domestic market today. Market was also careful due to monetary policies of central banks (FED, ECB, RBI, BoJ and BoE) during the month, which all concluded largely in line with expectations, providing a dovish outlook of the future. In the run-up to the Union Budget 2019-20, the PM and FM had lined up a series of meetings to draw a road map for reforms across departments, leading to ease of doing business, revive economic growth and generate employment opportunities. All these factors have helped the domestic market in the last one week.

One of the risks today is that the market has a very high expectation on the first budget of the new government. However, commitments announced in the interim budget with social expenditures and tax cut, constrains government to be ambitious given a fall in tax revenue. Tax revenue has been weak and likely to be muted at least during the 1st half of FY20, which restricts government to come out with big measures to push the economy in the short-term. Rather than near-term measures, we can anticipate long-term vision and ideas to correct the financial situation.

At the same time market also hopes that the long-term fiscal target is maintained. We feel that it’s a need of the hour to support the economy by increasing government spending & incentivizing business. We will not be surprised if fiscal target is diluted in the short-term, till the domestic and global weakness moderate. It will provide an immediate support to the economy. While additional revenue can be generated from non-budgetary resources like RBI reserves, divestment and Public Sector Units. Other than this the budget is likely to be simple with a long-term vision on agriculture, FDI, manufacturing in India and stability in PSUB.

We don’t anticipate any major reforms for PSUBs like privatization this time. Whereas we expect capital infusion to the tune of around Rs 40,000 cr in this budget and some hints on consolidation of PSUBs. With Indian economy is growing at a five-year low of 6.8% in 2018-19, it is required to strengthen the balance sheet of PSU banks to support the credit growth which has recently started picking up. Also, in 2018-19, the government has made a capital infusion of Rs 1,06,000 cr, which helped to bring five banks out of Prompt Corrective Action (PCA). Capital infusion is needed to bring the remaining five more government banks which are still under PCA.

Expectation for Q1FY20 got muted after subdued economic data. Auto and metal sectors are likely to be subdued due to low demand and benign raw material prices. Banking sector is expected to see good growth on account of low base in Q1FY19A and Q4FY19A while credit growth has picked up recently and provisioning related to NPA has reduced. Expectation from FMCG & IT has moderated recently while infrastructure and cement has improved. Overall, expectation for Q1FY20 is likely to be moderately positive led by base impact from Banks & Pharma. The risk is that, given slowdown in the economy, the expectation seems very high for FY20 and downgrade in earning is also possible.


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