Last Updated on Feb 16, 2023 by
This year’s Union Budget had three overarching themes: One, and perhaps the most important announcement, pertained to the increase in public capital expenditure by a staggering 33% over last year to a total of Rs. 10 lakh cr. An increase in capital expenditure is especially significant given that it comes only a year before the general elections take place and thus signals the growth focus of the government. Higher capital expenditure is desired as it encourages private investment by boosting consumer sentiment and demand.
The second salient feature of the budget is that the fiscal deficit target is set at 5.9% of the GDP (Gross Domestic Product). This is not only lower than this year’s deficit target of 6.4% but is also sentiment positive, given the fact that it comes on the back of the material increase in capital expenditure. Normally, higher expenditure must arguably lead to a higher deficit, but the Centre chose to cut back on some other expenditure categories, such as subsidies, to help reduce the deficit targets.
A lower fiscal deficit will, in turn, help the Centre control borrowing. This brings us to our third point, which is that the borrowing target by the Centre has not been raised significantly. The Centre has set a borrowing target of Rs. 15.4 lakh cr., slightly higher than this year’s budget estimate of Rs. 14.9 lakh cr. but in line with the market’s estimate. This is evident in the fact that India’s 10-yr government bond yield dropped from a high of 7.42% to a low of 7.28% during the budget day.
Remember, when the government borrows more from the market, it pushes up yields as demand for funds rises. Higher borrowing also tends to crowd out private investment as companies now find it expensive to borrow. In this context, a modest borrowing target by the Centre bodes well for the interest rates, private investment, and, therefore, the economy.
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From an investment point of view!
The government’s thrust on high capital expenditure may bode well for sectors such as infrastructure, specifically wires and cables or road construction and banking. Let us briefly touch upon all three of them.
Wires and cables industry
Since the wires and cables industry is directly impacted by economic growth, companies in this industry have grown their revenues and profits multifold over the past few years. Polycab, for instance, has grown its revenues at 15% CAGR (Compounded Earnings Growth Rate) and earnings at 21% CAGR. Similarly, KEI Industries too has grown its earnings at a brisk 27% CAGR over the past 3 yrs.
In the most recent conference call held by Polycab in January 2023, the management stated that the “private capex is showing early signs of improvement, supported by government measures such as the PLI scheme and optimum capacity utilisation on the back of robust domestic demand.” They further stated that they see “massive opportunities on the horizon due to pickup in capex cycles.” Similarly, KEI Industries also echoed this view. Their conference call held in October 2022 stated, “there’s good demand coming up from private capex in the industry.”
So even though the prospects for this industry remain bright, especially if the incumbency wins in elections, a word of caution is in order: Though the public capex has increased significantly, the stocks of companies in this sector are already trading at expensive valuations.
Polycab, for instance, is trading at over 24 EV/EBITDA, a significant 40% premium to its 5-yr median level. This valuation is only justified if Polycab can grow its earnings at 25% yearly for the next 10 yrs, which is ambitious. Similar story for Havells or KEI Industries. So, these companies may only make sense if the stock prices correct significantly without material change in long-term fundamentals.
Highways
A major chunk of public capex is in railways and highways. In highways, for instance, the capex has been increased by 25% to Rs. 2.6 lakh cr. This can lead to an increase in the awarding of projects by NHAI (National Highways Authority of India). This year, the NHAI has set a target of awarding 6,500 kms of road projects. This was higher than last year’s when the NHAI had awarded 6,300 kms of projects.
In all likelihood, and given the Centre’s increase in budget for highways, the target may be increased materially next year, thus leading to strong order books and revenue visibility for road construction companies such as HG Infra, PNC Infratech, or KNR Constructions, all of which have good balance sheets as well. Their valuations are at a fair level.
Banking industry
Banks may benefit from higher capex and continued growth thrust by the government. The domestic economy seems to be on a strong footing. This year’s Economic Survey stresses that India may continue to be among the fastest-growing economies in the world. Robust economic growth may thus augur well for credit growth.
In December, the bank credit grew by a staggering 14.9%. In fact, it has been in double digits at least since August 2022. This, coupled with the fact that the NPA (non-performing assets) remain at a decadal low, implies continued traction for banks. But lest one paint all banks with the same brush, it may help to be selective, given the stretched valuations in this sector.
In conclusion, remember that a budget is a short-term event and is unlikely to impact the stock market over a longer-term. Sectors such as infrastructure and banking are also cyclical, putting them outside most retail investors’ domain expertise. If one wishes, the best way to take exposure to these stocks could be through sectoral mutual funds. Note, however, that these are inherently risky because they are concentrated in one sector.
A quick screen of “sectoral funds – infrastructure” and “sectoral funds – banking” on Tickertape’s Mutual Fund Screener may give about 33 interesting schemes. Here’s a list of the 10 best-performing schemes in the infrastructure sector.
| Name | Sub Category | Plan | AUM (Rs. in cr.) | CAGR 3Y (%) | Expense Ratio |
| Quant Infrastructure Fund | Sectoral Fund – Infrastructure | Growth | 839.69 | 37.078 | 0.64 |
| ICICI Pru Infrastructure Fund | Sectoral Fund – Infrastructure | Growth | 2,272.95 | 25.59 | 1.65 |
| Bank of India Mfg & Infra Fund | Sectoral Fund – Infrastructure | Growth | 87.91 | 24.60 | 1.06 |
| Kotak Infra & Eco Reform Fund | Sectoral Fund – Infrastructure | Growth | 665.40 | 22.21 | 1 |
| Canara Rob Infrastructure Fund | Sectoral Fund – Infrastructure | Growth | 244.57 | 21.22 | 1.33 |
| Tata Infrastructure Fund | Sectoral Fund – Infrastructure | Growth | 953.45 | 20.84 | 1.42 |
| Invesco India Infrastructure Fund | Sectoral Fund – Infrastructure | Growth | 440.30 | 20.77 | 1.08 |
| IDFC Infrastructure Fund | Sectoral Fund – Infrastructure | Growth | 630.55 | 20.66 | 1.2 |
| DSP India T.I.G.E.R Fund | Sectoral Fund – Infrastructure | Growth | 1,786.53 | 20.64 | 1.41 |
| Franklin Build India Fund | Sectoral Fund – Infrastructure | Growth | 1,213.74 | 19.78 | 1.23 |
Note that the data is as of 8th February 2023. The filters used to derive the list are as follows:
- Launch the Mutual Fund Screener
- Search and select ‘Sectoral Fund’ under ‘Category’ – Equity
- Select ‘Infrastructure’. For ‘Banking’, choose ‘Sectoral Fund – Banking’
- Here, the list is sorted by 3-yr CAGR. You can also use other key parameters like AUM, NAV, 1-yr returns, etc.
