Manish Sonthalia, CIO, Emkay Investment Managers, says “last year at the same time, there was a 30% increase in capex. But the ask run rate to achieve the Rs 10 lakh crore is steep at Rs 1 lakh crore. I do not think that number will get executed till March. So, a bit of rebalancing from capex to subsidies might happen and that should be good for the common man who will likely spend that and get some relief from very high food inflation that we are seeing in the economy and that bodes well for the election community as well.”

You have seen many budgets and analysed the market impact if any and which sectors get the boost. This time, I would like to understand what would the market watch out for on the capex and fiscal deficit number and why it would be important in the current environment?
Manish Sonthalia: The government is doing well as far as the revenue collections are concerned. We have seen some around 12% increase in GST collections plus some 17-18% increase in direct tax collections all in all plus transfers from the RBI to the government, etc, all in all gives us the comfort that since the revenue collection is quite robust government is on its way to achieve its fiscal deficit number which they targeted for fiscal 23-24.

As against Rs 19-odd lakh crore of total fiscal deficit for the half year, they have been slightly better than what had been estimated or budgeted for that Rs 9 lakh crore. All in all, fiscal deficit numbers would be better as against the estimated numbers for FY24 and based on that, the revised target, lower than what was previously estimated is going to be set for FY25 and all on the basis of nominal GDP growth projections of anywhere between 10.5% and 11%.

If the numbers are projected to be beyond 11%, then they need to be taken with a pinch of salt, but any nominal GDP growth of between 10.5% and 11% would be quite credible. That is how I would look at it as far as the fiscal deficit numbers are concerned.

Ahead of the Budget, every time there is expectation whether there would be some tweaking or relief for the common man on the income tax front. Do you expect that this time round, after leaving some extra money in the hands of the income tax department, there would be some relief for a consumption boost?
Manish Sonthalia: Food inflation is running high and in the backdrop of the elections that is likely to be there in April and May. I would believe that subsidy numbers are likely to be breached on the higher side. So, already, the entire budgeted allocation to fertilisers has been spent and, obviously, if you look at last year’s numbers, we spent around 129% or 130% of what was the budgeted allocation last year.

So, since we have already exhausted the fiscal 23-24 fertiliser subsidy amount, this number is going to get higher. Secondly, food subsidy numbers will be breached on the higher side because that number has been exhausted based on the numbers that we have seen so far and compared with the same period last year. So, of the Rs 2 lakh crore of full subsidy amount and because food inflation is running high, I would believe that subsidy numbers are likely to be on the higher side. So how will the balancing happen?

I think, not all the amount that is budgeted for capital expenditure in fiscal 23-24 are likely to be spent. The finance minister in the budget speech had articulated that they would be spending Rs 10 lakh crore on capex. Based on available numbers so far, Rs 10 lakh crore essentially means around Rs 83,000-84,000 crore per month and as against Rs 73,000 crore per month the same time around last year.

So, obviously, the spending has been quite good. If you look at last year at the same time, the seven-eight months of data that we have, there was a 30% increase in capex. But the ask run rate to achieve the Rs 10 lakh crore is steep at Rs 1 lakh crore. I do not think that number will get executed till March. So, a bit of rebalancing from capex to subsidies might happen and that should be good for the common man who will likely spend that and get some relief from very high food inflation that we are seeing in the economy and that bodes well for the election community as well.What is your take on the defence space, not only in this Budget but outside of it also, so much work has been done. The defence space has got re-rated. Do you have exposure in defence too or do you think that it may not be a great idea to be a fresh buyer in defence stocks? But yes, there is structural tailwind in that space?
Manish Sonthalia: Yes, I think the defence space does present a good opportunity for the medium term but current valuations may be slightly prohibitive. On an overall basis, defence expenditure accounts for around 13-14% of the total expenditure. In FY24, the government budgeted for something like Rs 5.9 lakh crore. I think they are on target to spend that but most of it is actually going into revenue expenditure and of the revenue expenditure, there has been some provision for pensions of defence forces. So, this time around, again on a higher base of the budget balance sheet, we will have 13% to 14% spent on or allocated for defence and in that backdrop, the capital allocation will also come through.

So, it is a multi-year story as far as defence stocks are concerned. As and when there is a correction, these would be one of the spaces where one should likely be adding and we will also try to take a look at a few of them and see how to buy them in our portfolio.

How are you playing the railway ecosystem in your portfolios? Traditionally, there must be half a dozen companies which may be directly linked to railways but over a period of time, many different categories of companies are foraying into railways. Amber is doing a railway related JV and air conditioning. How are you playing that in your portfolio? There’s a very dynamic minister and much is happening outside the Budget in railways?
Manish Sonthalia: In the Budget document, this is one of the spaces to watch out for how much is the allocation to railways, roads and housing. These are three main areas where one needs to see how much expenditure the government wants to allocate. As per the allegation that was there last year, the railways has already spent more than 80%. So obviously, you see a lot of order books coming through for the railway sector.

Again, it is a multi-year theme but stocks have rocketed and moved up too soon, too fast. I would wait for corrections to look into the space but there are quite a few good opportunities in this space, particularly where there is some involvement of technology, whether it comes to let us say Kavach system or the signalling system etc. Not just the plane, the wagons order or coaches ordering, which is more of a fabrication sort of a work but where there is some involvement of technology. I would be more inclined to look at those spaces. But many new companies will cater into this space and the area is very exciting but valuations need to be balanced.

You briefly touched upon housing. Housing has a multiplier effect as far as the economy goes. In the markets too, the real estate company volumes are speaking for themselves. Where is the real estate cycle right now and what is the best way to play it? Is it housing companies, housing finance, real estate, building material?
Manish Sonthalia: Any and all of them, I think there will be impetus on a few more deductions coming in on the housing front. The country needs many more houses than we have. And obviously, the lower income strata will have some benefits as it is; they hardly pay any tax till about an income slab of around Rs 9-10 lakh. So, further incentives on housing will come through in the Budget or whenever the Budget is announced post elections; then it should be there. And obviously real estate is in an up cycle, more like 10 to 15 years.

We are already there in the second or third year and there is a long way to go on the upside. So anything and everything associated with real estate demand is likely to do well whether it be tiles, whether it be cement, off and on there will be pockets of strengths and weakness because it is not a one-way linear journey on the upside. But these spaces do have opportunity.

Where are you more comfortable right now in terms of valuations, policy impetus and earnings growth? Is it auto companies or auto ancillaries or batteries?
Manish Sonthalia: First of all, I don’t think FAME 2 is going to get extended because of a lot of misuse of that. There is a sunset clause on 31st March. If at all it is launched in a modified form, I think checks and balances will increase when it comes to FAME 3. Having said that, I think we are positive on two-wheelers and more than four-wheelers as we move into FY25. We are seeing that, obviously, rural is changing at the margin.

The festive season was very good. And post the fourth quarter, when there is a year-end and the new year, we are likely to again see better demand for the two-wheeler space, per se. In the auto ancillary space, tyres are doing quite well. Valuations are extremely reasonable. In a few other areas like forgings, selective names are there. Even batteries, where there is a bigger value-add. And we are more inclined to look at companies working on technology where there is some element of battery storage system innovation going on. Others, which are catering to the ICE side of the automobile space would be a lacklustre show.