One expects an election year budget to focus on sops for key vote banks, rather than on long-term thinking. But Finance Minister Nirmala Sitharaman surprised everyone by going the other way.

The subsidy cuts and lower fiscal deficit emphasis in the “Viksit Bharat (Developed India)" Budget, suggests that the Finance Minister was not paying attention to the usual crowd. Sitharaman seemed to be talking to international investors rather than Indian voters, when she emphasized spending discipline.

The message was happily received: the yield on India's 10 year bond immediately dropped by 11 bps, lowering borrowing costs. A lower deficit and debt level will boost India’s credit rating outlook, and make Indian bonds a lot more attractive to foreign investors ahead of India’s inclusion in global bond indexes in June.

So June is what seems to be on the FM's mind, rather than the election months of April/May.

The government has also focused on capital expenditure, particularly on manufacturing and infrastructure, by raising the capex allotment by 11.1% to Rs 11.1 lakh crore for FY25. This budget aims for short-term utilization, a shift from the previous 2-3 year long capex plan.

Half of FY25 budget capex dedicated to railways and roads

Although the capex increase has been criticized as being too modest, especially when compared to the substantial hikes in FY22 (40%), FY23 (24%), and FY24 (37%), Sitharaman pushed back, stating that capex levels are already high, and that the current increase was generous.

Despite the upcoming elections, the government has chosen not to open its wallet to please key vote constituencies. The government seems confident about retaining power without the usual populist measures like tax breaks for the middle class, or schemes for the rural economy.  The budget instead focuses on boosting important sectors.

In this week’s Analyticks:

• Budget impact: FY25 Budget focuses benefits on key sectors
• Screener: MFs and FIIs buying stocks that got a Budget boost in auto parts, pharma, oil, defence and electric utilities sectors

Let’s jump in.

Government wants to get out of the red zone, with an eye on cutting deficits

This government is not a fan of debt. A focus on reducing the fiscal deficit has become a hallmark of the Modi years (except for the Covid-19 period). The government has targeted the fiscal gap by limiting budgetary spending.

For FY25, the fiscal deficit is expected to decrease to 5.1% of GDP (FY24RE at 5.8%) and drop further to 4.5% in FY26. 

India’s fiscal deficit narrows in post-Covid recovery

The budget estimates for FY25 predict an 11.7% increase in total receipts to Rs 30.8 lakh crore, with spending set to rise by 6.1% to Rs 47.6 lakh crore. A lower increase in spending will reduce the deficit.

The government has scaled back spending in areas like fertilisers (-13.1%), education & literacy (-7%), food and public distribution (-3.4%), and roads & bridges (-1.6%). Most of the budgetary cuts have targeted departments that provide subsidies, but generate low revenue. 

Traditional sectors have seen lower allocation in FY25

Emerging sectors like semiconductors, telecommunications, renewable energy, defence and EV manufacturing have been rewarded, and received significant investment. The manufacturing sector overall is expected to boost the economy and create more jobs.

Sectors like automobiles, defence, telecom, oil & gas, utilities and pharmaceuticals have seen increased allocation. 

Increased allocation to PLI scheme to benefit Auto and Auto OEMs

The government has cut FAME subsidies for electric vehicles (EVs), and instead increased allocation to the EV ecosystem, favoring EV batteries and auto OEMs. The government has been vocal about the benefits of the production-linked incentive (PLI) scheme and has increased allocation for it by Rs 3,500 crore.

To date, auto and auto component manufacturers have been allocated Rs 25,938 crore (FY23-27) under the PLI Scheme. The increased PLI spending by the government has attracted investments of around Rs 67,390 crore in the sector till December 2023.

Tata Motors jumps in week post-budget

Firms like Motherson Sumi Wiring, Exide Industries and Hero MotoCorp are  in line to benefit from the PLI Scheme. Despite delays in  shortlisting, these firms are likely to gain post-allotment. Tata Motors, for instance, received the eligibility certificate for the PLI scheme only in December 2023. This comes at a time when auto sales have been encouraging. Meanwhile, smaller firms are postponing their capex plans to  maximise their benefits from the scheme post-approval.

Defence sees higher budgetary allocation

The defence industry’s allocation has increased by 9% in the FY25 budget, with nearly 23% (Rs 40,777 crore) earmarked for aircraft and aero engines. While most of this spending will be in buying foreign-manufactured fighter aircraft, the defence-offset policy requires foreign firms to invest a portion of their deal value within India, a boost for domestic manufacturers.

Domestic firms often establish joint ventures (JVs) with these foreign counterparts to manufacture parts for these systems. These JV firms also export parts to foreign buyers.

Astra Microwave Products has formed a JV with Israel’s Rafael Defence to manufacture communication systems, and has won orders for satellite sub-systems, airborne radar, etc from DRDO, ISRO and Defence PSUs.

Astra Microwave sees sharp gains post-budget

Bharat Dynamics has also inked pacts with Thales to manufacture 70 mm laser-guided rockets in India. India is pursuing the sale of Tejas aircraft (developed by HAL) to smaller nations like Cairo, Egypt and Argentina.

Energy stocks rise with increased support for OMCs and renewable energy

The oil & gas industry has been taking advantage of  Russian sanctions and India’s strategic shifts in oil procurement. However, with the volatile global scenario and tensions in the Suez Canal, the government has increased capital support for oil marketing companies by Rs 15,000 crore. 

This move has led to significant gains for Indian Oil Corporation, Hindustan Petroleum Corporation, and Bharat Petroleum Corporation post-budget.

Oil marketing companies rise post-budget

The index of industrial production (IIP) for electricity has increased by 6.9% YoY from April to December 2023, a figure expected to double by 2045. Previous budgets increased allocations for thermal projects to ensure  24-hour electricity supply. However, many projects are still being implemented.

To meet India’s growing energy needs and fast-track energy generation, the FY25 budget has raised the allocation for renewable energy like solar from Rs 7,623 crore to Rs 12,602 crore.

This budgetary focus is set to benefit electrical utilities and allied firms. Major beneficiaries include electricity producers like Adani Green, NTPC, and Coal India; transmission and distribution firms like Power Grid Corporation of India); and finance firms like Power Finance Corporation.

Screener: Stocks bought by MFs and FIIs, that got a Budget boost in the auto parts, pharma, oil, defence and electric utilities sectors

Mankind Pharma, Inox Wind lead in MF and FII holding QoQ change

Here we take a look at companies that mutual fund and foreign institutional investors (FIIs) bought in the latest quarter. These companies are also from five industries that should benefit from the FY25 budget – auto parts & equipment, pharmaceuticals, electric utilities, refineries/petro-products and defence. 

Major stocks that appear in the screener are Mankind Pharma, Inox Wind, Lupin, KPI Green Energy, Pricol and Ami Organics.

Mankind Pharma leads with a 3.7 percentage point QoQ rise in MF holdings to 9.8% in Q3FY24. Invesco India Focused Fund Regular Growth bought a 4.2% stake in the company during the quarter. FIIs also bought a 2.6% stake in the company during the same period. 

Inox Wind comes next with a mutual fund holding increase of 2.9 percentage points to 10% in Q3FY24. The electric utilities company’s FII holding also grew by 6 percentage points during the quarter. Smallcap World Fund bought a 2.3% stake in the company over the past quarter, while East Bridge Capital Master Fund I Ltd bought a 1.5% stake.

You can find more screeners here,

Signing off this week,

The Trendlyne Team