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Informist, Saturday, Feb. 1, 2025

MUMBAI – Market participants should shift their preference to the consumer discretionary universe and move away from the industrials and manufacturing sector, Seshadri Sen, research head at Emkay Global Financial Services Ltd., said Saturday in a post-Budget interaction with analysts. The suggestion follows Finance Minister Nirmala Sitharaman's announcement of zero tax to be paid on personal income of up to INR 1.2 million. She made the announcement while presenting the Budget for the financial year 2025-26 (Apr-Mar).

Sen expects this to be the point where the market pivots to consumption-led stocks from companies that have benefited from the government's capital expenditure drive in recent years. The proposed tax cuts are likely to drive consumption, especially in rural markets, which have been weak throughout 2024, an equity analyst at Emkay Global said. There are other tailwinds as far as consumption is concerned, which the brokerage sees turning around in the second half of 2025.

Apart from the consumer discretionary universe, the brokerage is overweight on the real estate, automotive, and financials sectors. While real estate companies may benefit directly from the Budget announcements, they may also benefit from the overall consumption stimulus, the brokerage said.

Emkay Global feels the financial sector, too, is now a broader consumer play. However, it sees a growth-valuation mismatch in the sector and expects any potential rally there to be short-lived.

The tax break may also address the affordability gap in the entry-level segment of two-wheelers and passenger vehicles, an analyst covering automobiles at Emkay Global said. The 30-40% increase in prices of entry-level vehicles in the last 4-5 years and minimal increase in customers' income levels had resulted in this gap, the analyst said. Among two-wheeler stocks, the broking firm is positive on Hero MotoCorp Ltd. and TVS Motor Co. Ltd. Among passenger car manufacturers, it recommended Maruti Suzuki India Ltd. and Hyundai Motors India Ltd.
 

On the other hand, the impact on commercial vehicles will likely be negative to mixed, the brokerage said. Execution and the disbursement of capital will be watched to understand the actual on-ground impact on demand for trucks, an analyst at Emkay Global said.

Although the brokerage recommended consumption-led stocks, it said fast-moving consumer goods companies will not react much to a stimulus and the sector is probably beset by a few issues. However, downtrading in FMCG goods is expected to get arrested because of the tax breaks, Emkay Global said. "...the (FMCG) companies wanted to take a price increase that will gradually get absorbed," the brokerage added. It is also positive on GoFashion (India) Ltd., Sapphire Foods India Ltd., Westlife Foodworld Ltd., and Varun Beverages Ltd.

Emkay Global now prefers consumer discretionary companies over industrial stocks but recommended caution when going short on the latter as it believes capital expenditure growth is only moving into a normalised phase and is not going to slump. Investing in Larsen & Toubro Ltd. is a good way to stay invested in the theme so that one does not miss out in case there is a positive surprise, it said. Small-cap and mid-cap capital expenditure-driven stocks that have seen valuations soar may, however, see some time corrections, the brokerage added.

MACROECONOMY

Sen said the Reserve Bank of India may go in for a nominal interest rate cut if the currency pressure abates. "To me, the more critical factor from an equity market perspective and a growth stimulus perspective is whether they can manage to keep liquidity under control," Sen said. "...if they manage that, that will be a more important outcome in the short term, as well as whether they liberalise some of the lending controls that have been brought in from late 2023." However, if the central bank decides to move forward with a rate cut, it would be a shallow cut, Sen added. 

The brokerage said the slowdown in government capital expenditure was not entirely unanticipated. While the brokerage expects some growth in capital expenditure going forward, it said the ratio of capital expenditure to GDP has plateaued after peaking in FY24.

The government would be focusing a lot on voluntary disclosure of income by the public, said Madhavi Arora, an economist at the brokerage, adding it means they are still focusing on a compliance-led increase in tax buoyancy. Also, the interest payments due from the government are higher than its capital expenditure target for FY26, and this could be an impediment to spending, the brokerage said.  End

Reported by Aman Aryan and Anand JC

Edited by Rajeev Pai

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