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Edited excerpts from the chat on value picks, budget proposals and PSU upside.
How will you approach the market ahead of the budget announcement? Do you think the bias towards capex, infrastructure and corporate related themes will remain intact post July 23?
The government’s focus in the initial phase of Amrit Khal is primarily on building infrastructure to reduce logistics costs from 14% to 8%. This long-term goal, expected to take more than a decade, hinges on developing rail infrastructure and integrating it with other modes of transport through multi-modal logistics hubs. Hence, capital investments in rail, ports, roads and airports will be prioritised. Additionally, digital infrastructure will continue to be supported. The focus on public sector enterprises in rail, power and defence is expected to continue in the next budget.
Overall, as an investor, what do you expect from this year’s budget?
From an individual perspective, tax rate changes and other tax cuts are expected, which may boost demand for housing and consumption. On the business side, production-linked incentive (PLI) schemes and other R&D or capital expenditure-based incentives are expected to continue and expand across sectors such as electronics, pharmaceuticals, textiles, data centers, green energy, clean technology and AI.
What are the best and worst case scenarios for investors in the proposed budget?
The best case scenario would involve significant changes to personal tax laws, significant investments in infrastructure and incentives for favoured sectors. Conversely, the worst case scenario would involve minimal changes to tax brackets and limited incentives for PLI schemes.Do you agree that PSU Railways stocks have momentum in the short term but are expensive to own in the long term?
National Railways stocks have strong growth potential owing to a large order backlog that is likely to expand further post the budget announcement. Focus on fast execution is expected to drive revenue and profit growth. If the growth rate is achieved, the current valuation will be justified, otherwise, it may look expensive. However, this scenario is not uniformly applicable for all national railways stocks.
What parts of the market do you think still offer sufficient value at this stage of the bull market?
Our analysis highlights several promising sectors. The most attractive is the banking sector, both public and private. Assets and revenues are expected to grow at mid-to-high double-digit rates, with earnings accelerating, driven by rising demand for credit due to capital investment and consumption. These stocks are available at low price-to-earnings multiples.
The power sector is also an area to watch, with significant capital works underway at some of the power generation companies. Once these projects come online and start generating revenue, earnings are expected to accelerate and these stocks are also available at low forward P/E ratios.
Finally, the IT sector offers attractive opportunities. Despite high valuations for companies such as Nvidia, demand for AI capabilities suggests significant growth for IT consulting companies. Indian IT companies in particular are well poised to benefit from this trend, currently trading at low forward earnings multiples.
How do you interpret the sustained rise in state-owned enterprise stocks since the election? For those investing over the next five years, are state-owned enterprises worth investing in?
At OmniScience, we prioritize competitive advantage and profitability over company ownership. Some PSUs have demonstrated high profitability, significant growth opportunities, and capital efficiency, making them attractive investments. However, valuation matters. Many PSUs were undervalued, while some have come closer to their intrinsic value and, if all goes well, will deliver market average returns. However, some PSUs still possess the aforementioned characteristics and remain undervalued, offering long-term investment opportunities.
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