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Informist, Saturday, Feb. 1, 2025

 

By Anshul Choudhary

 

MUMBAI – The modest increase in capital expenditure in the Union Budget for the financial year 2025-26 (Apr-Mar) and the government's focus on reducing its fiscal deficit would mean the economy is unlikely to come out of the current slowdown in the near term, analysts said. While lower tax rates may boost the earnings of consumption-related companies, they are unlikely to deliver the same effect that a boost in capital expenditure would have had on overall economic growth and the stock market.

 

What's more, the government will undershoot its budgeted capital expenditure for FY25, and this is likely to affect corporate earnings in the March quarter as well. The government's own estimates now show it may spend 9% lower than the budgeted capital expenditure for the current financial year. Stock prices, which are down owing to a slowdown in earnings growth, with even the December quarter results failing to excite investors, are unlikely to look up anytime soon, the analysts said.

 

Another pain point from the Budget was the lack of concessions for private-sector companies, which are yet to start their capital expenditure. In a scenario where capital expenditure by the government will also now slow down, stocks that had run up on expectations of big spending may see a further correction, given the uncertainty around a pick-up in capital expenditure by private players too, the analysts said.

 

"On the taxation front, it is good relief to the middle class... but from an economy perspective, there is nothing," said Dharmesh Kant, head of equity research at Cholamandalam Securities. "There are some reforms, including deregulation, which may take five or 10 years to deliver (results) into the economy. When you are going through a cyclical crisis, there should be flexibility (in spending)."

 

The Budget Saturday saw an allocation of INR 11.21 trillion for capital expenditure in FY26, an increase of a mere 1% from the previous Budget. This is significantly lower than the 5-10% increase that most analysts had expected. Moreover, there is now a worry that the government may not actually spend the budgeted amount next year either, given its focus on reducing the fiscal deficit.

 

Finance Minister Nirmala Sitharaman in her Budget speech said the government intends to reduce its fiscal deficit to 4.4% of GDP in FY26, from the expected deficit of 4.8% in FY25. "Capital outlay was maintained (in the Budget)... there is a chance that it might get compromised and capex may underperform in the coming quarters," Dhananjay Sinha, head of research at Systematix Group, said. Sinha described the Budget as conservative and said it does not give him confidence on earnings at an aggregate level.

 

Considering that muted growth in spending by the government and by private players would keep corporate earnings in check, analysts worry that stock market returns in 2025 are likely to be muted, just like in 2024, when the Nifty 50 gained just 9%. Kant said he does not rule out another 7-8?ll in the Nifty 50 to below 22000 points in the coming months. On Saturday, the Nifty 50 closed slightly lower at 23482.15 points.

 

SECTORAL ROTATION
Following the announcement of the Budget, a churn is underway in the equity market with investors likely to sell shares of companies dependent on government orders, including those from sectors such as energy, defence, roads, and railways, analysts said. These stocks had run up to peak valuations on expectations of a good increase in the government's capital expenditure. Several stocks, especially those in the mid-cap and small-cap segments, are likely to see a significant correction in valuations. Investors are likely to move into consumption-related companies such as fast-moving consumer goods, consumer durables, and automobiles after Sitharaman said salaried people earning up to INR 1.2 million will not pay any income tax from the next financial year.

 

"I don't see any major positive or negative because of the Budget... some sector rotation is likely and investors may prefer sectors like FMCG and we may see moderation in sectors such as defence," Bino Pathiparampil, head of research at Elara Securities, said.

 

Several other analysts spoke on similar lines. In a post-Budget discussion, Emkay Global Financial Services Head of Research Seshadri Sen said it was time to move away from stocks dependent on capital expenditure. "As far as the overall impact on the market is concerned, in our 2025 outlook report, we had said that the market is pivoting away from the capex manufacturing story back to consumption, and this Budget reinforces that," he said.

 

This kind of sector rotation was visible on Saturday itself. Following the Budget presentation, investors made a beeline for stocks in sectors such as FMCG, automobiles, retail, and consumer durables. Lower income tax is expected to boost the sales of discretionary products, which will help companies in these sectors grow their revenues and profits, analysts said. Among sectoral indices, the Nifty FMCG and Nifty Consumer Durables rose 3?ch, while the Nifty Auto index rose 2%.

 

While the income tax reduction is seen as positive for consumer-facing companies, some analysts advised caution by investors, as many of the bigger FMCG companies are losing market share to regional players and this may not change despite the push from the Budget. For the automobile sector, analysts said investors should wait for the Reserve Bank of India's decision on interest rates next week before taking a decision to buy these stocks.  End

 

With inputs from Anjana Therese Antony

Edited by Rajeev Pai

 

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