Post Budget Analysis: Impact of Budget 2021-22 on Equity

Impact on Equity

The stock markets have been on a high since the announcement of Union Budget 2021.The benchmark indices ended higher for the third straight session on Wednesday, buoyed by positive announcements in the Budget and better than expected Q3 results. The Budget is being viewed favourably by the markets mainly due to higher capex spending by the government & status quo on direct taxes and no incremental taxes on capital gains. Here are the likely sectors that could benefit from Union Budget 2022.

Sector specific impact

Banking

• There were significant announcements aimed at the banking and insurance sector. The government has proposed setting up an asset reconstruction company and an asset management company (AMC) to clean up non-performing assets in the banking sector. 
• According to estimates by Credit Suisse, this will help to accelerate NPA resolution post Covid-19 stress. The stress is now limited to 1-2% of Loan Book for large private sector banks, and 3-4% for smaller players. The aggressive steps taken by large banks in early months of the pandemic ensured that their capital buffers were prepared for any eventual spike in defaults in their loan books. 

Accordingly, Global firm Morgan Stanley has upgraded share price targets for large private banks including HDFC Bank, ICICI Bank, Axis Bank and IndusInd Bank noting that these banks have emerged stronger post-crisis. The firm expects RoAs (return on assets) to cross previous peaks, which will drive multiples much above their long-term averages.

Besides, the FM also made announcements on the front of recapitalisation of PSU banks. She announced the PSU bank recapitalisation scheme of Rs 20,000 crore for FY22. This could be beneficial for state-owned banks. 

Insurance

There have been two major announcements which could impact stocks in the insurance sector. 

ULIPs to be taxed: ULIP policies with a premium of more than Rs 2.5 lakh per annum to be taxable. In case the annual premium exceeds Rs. 2.5 lakh across all the ULIPs you have invested in, then there will no be no tax benefit going forward. This is applicable only for policies purchased after Feb 1, 2021.

• Impact: This comes as a negative for listed Life insures as the available universe of ULIP business reduces, especially in high net worth/affluent category (premium more than Rs 2.5 lakh). Now that the tax advantage for ULIPs goes away, we could see higher inflows into mutual funds.

This could negatively impact ICICI Prudential Life, as it generates more than 50% of its new business from ULIPs.

• FDI in insurance hiked to 74% from 49% earlier: The government has proposed to  increase the permissible FDI limit from 49% to 74% in insurance companies and allow foreign ownership and control with safeguards. Apart from this, the LIC IPO would be a big bang event. 
• Impact: This is a welcome change that Indian control is no longer required which was a long-standing demand of the insurance sector. This paves the way for more M&A activity in the insurance sector.

Increase in FDI limit to 74% in insurance may particularly be positive for HDFC Life.

Consumption

• No news on 'Sin Taxes' comes as a positive for ITC. There has been no increase in cigarette taxes, compared to an 11-16% increase last year. According to Credit Suisse, ITC is now a COVID recovery play, as cigarette volumes are likely to improve consistently. With additional levers like restructuring, FMCG growth, stock has a path to rerating. 
• The allocation towards MGNREGA has increased to Rs 73,000 crore from 61,500 crore earlier. This would aid in continuing strong volume growth and momentum for consumer and FMCG companies, especially for those which have a higher contribution from rural areas. This is positive for HUL and Nestle.
• Rationalisation of import duty on gold may be a positive for Titan.

Infrastructure

The government has announced a sharp 34.5% YoY increase in Capex spending to Rs 5.54 lakh crore in FY22. Capex allocation for the nine core infrastructure sectors \u2013 civil aviation, new and renewable energy, power, railways, roads, shipping, rural development, urban development, and water resources is expected to increase 17% in FY22 as compared to the previous year.

Key infrastructure players such as Larsen & Toubro, KNR Constructions and IRB Infrastructure Developers are poised to benefit from this rise in infrastructure spending allocation. Global firm CLSA prefers stocks like L&T, UltraTech, NTPC, Power Grid and GAIL.

Housing

The government has extended the timeline for taking home loans and claiming additional tax deduction on interest payment till March 31st 2022. This bodes well for housing finance companies such as HDFC. 

Auto

The vehicle scrappage policy which aims to replace commercial vehicles (CV) and passenger cars (PV) older than 15 years and 20 years of age, respectively, is expected to benefit CV manufacturers such as Ashok Leyland and Tata Motors and M&M, Maruti Suzuki in the Personal Vehicles space. 

Target for Sensex raised

Global firm Morgan Stanley has raised the target for Sensex to 55,000 by Dec 2021, from 50,000 earlier saying that Budget 2021 augurs well for a new private investment cycle, a recovery in domestic equity flows and earnings growth. Premium over historical averages for the Sensex reflects a higher confidence in mid-term growth cycle.

Overall, the Budget has given priority to more fiscal support and spending with the hope that the resultant economic growth will offset the negative impact stemming from a higher deficit. The slew of measures announced for infrastructure and rural development should help to bring the economy back on track.  No negative surprises in terms of taxation such as a higher LTCG or new surcharges have also given a boost to investor sentiment.