Have you heard of RRR? No, we aren’t talking about the Oscar-winning blockbuster film, though this RRR is a blockbuster of a different kind. We’re talking about the trinity of Reforms, Rewards, and Returns, from the lens of market participants. Reforms, if successfully implemented, can provide rewards and generate positive returns. And that, for market participants, is a blockbuster.
Let’s break it up. Reform is high on the agenda for Narendra Modi, who recently became India’s Prime Minister for the third consecutive term. With the Union Budget 2024-25 around the corner, expectations are high on the Street of continued policy support across sectors—especially infrastructure, manufacturing, and rural—to sustain the growth momentum, which in turn will boost the markets.
Government schemes and policies have contributed immensely to India’s growth in the past decade. As a result, sectors such as consumer durables, industrials, capital goods, real estate, and infrastructure have outperformed the market during that period. The numbers confirm this. Since May 2014, the BSE Consumer Durables index advanced the most at 661%, followed by the BSE Industrials (520%), the capital goods index (411%), consumer discretionary (400%), realty (361%), and information technology (355%), while the benchmark BSE Sensex advanced 230%.
Mohit Batra, Founder and CEO of equity research firm MarketsMojo, says, “The Modi-led government has undertaken significant reforms over the past decade, transforming India—from being part of the Fragile Five to the fastest-growing economy globally.”
One such reform is the goods and services tax (GST). The implementation of GST in 2017 has benefited sectors such as consumer durables, industrials, capital goods, and real estate, per market analysts. Another government programme that helped the sector was the ‘Make in India’ initiative that aims to reduce reliance on imports. Take the Blue Star stock as an example from the consumer durables space; its stock price surged 1,166% to Rs 1,710.60 on July 5, 2024, from `135.15 on May 30, 2014. It’s not alone; Titan Company, Havells India, and Voltas also rallied 952%, 879%, and 678%, respectively, during the same period.
“Government initiatives targeted at boosting manufacturing have acted as tailwinds for many cyclical sectors in India. These include Atmanirbhar Bharat, Make in India, and PLI,” says Dikshit Mittal, Fund Manager and Senior Equity Research Analyst at LIC Mutual Fund. “As capacity utilisation increases and there is more visibility of earnings from new markets, including exports, the need for capital expenditure (capex) arises. That has led to growth in earnings for companies in the industrials and capital goods sectors,” Mittal adds.
The government has so far announced PLI schemes for 14 key sectors with an outlay of Rs 1.97 lakh crore to enhance India’s manufacturing capabilities and exports. “The PLI scheme is designed to encourage domestic manufacturing in a range of industries, including electronics and white goods,” says Alok Agarwal, Head-Quant and Fund Manager, Alchemy Capital Management. “Additionally, the Digital India campaign aims to enhance internet accessibility and digital infrastructure contributing to the expansion of consumer durables such as smartphones and other electronic gadgets,” he adds.
In the real estate sector, the Regulation and Development Act (RERA), 2016, has increased the trust of buyers by bringing in transparency. The Pradhan Mantri Awas Yojana (PMAY) and other affordable housing schemes also boosted real estate demand. The introduction of REITs provided an alternative investment avenue, increasing liquidity in the sector. As a result, stocks of realty majors gained. For example, Brigade Enterprises jumped 2,008% to Rs 1,344.60 on July 5, 2024, from Rs 63.77 on May 30, 2014. Godrej Properties (up 1,247.45%), The Phoenix Mills (up 1,186.60%), Prestige Estates Projects (up 780.72%) and Oberoi Realty (up 645.13%) are other major gainers. “RERA forced developers with weak balance sheets and poor governance standards to either improve their business or wind up. The cut in interest rates by the central bank to revive the economy, after lockdowns aimed at containing Covid-19 infections, led to higher affordability. This, along with subdued new launches, led to subsequent absorption of inventory. Market share gains by organised players further helped the listed real estate sector,” says Mittal.
Meanwhile, the combined profitability of the banking sector jumped more than 5x to Rs 3.22 lakh crore in FY24 from Rs 62,005 crore in FY14. The BSE Bankex gained 256% between May 30, 2014, and July 5, 2024. Sharing its view on the Indian banking sector, investment firm CLSA says Indian banks are well-placed after a roller coaster decade. “Balance sheets are the strongest they have been in over a decade. The return on equity is at its highest since FY11,” it adds in a report.
Coupled with all these initiatives, Agarwal believes that liberalisation of FDI, banking reforms, and the Insolvency and Bankruptcy Code have improved investor confidence, increased productivity and improved growth conditions, all of which aided in India’s overall economic development pushing the Indian stock market to new highs.
The Road Ahead
The upcoming Budget will set the tone of policy actions for the next five years. LIC MF’s Mittal believes that the Budget will ensure policy continuity. “It may focus on infrastructure spending, job creation, sustaining capex momentum, and pushing for revenue growth,” he says, adding that there could be some steps to improve consumer purchasing power. Markets are generally driven by earnings outlook and cost of capital, so if there is no major negative tax surprise, they are likely to take the Budget positively, he adds. They are already upbeat—the BSE Sensex recently breezed past the 80,000-mark.
Analysts are also positive on the PSU space. The combined net profit of listed state-owned firms surpassed Rs 5 lakh crore for the first time in FY24, compared to Rs 1.55 lakh crore in FY14. “There has been a change in governance, focus on transformation, and good leadership, which has changed the landscape for PSUs in various sectors. The government’s focus on spending across sectors like infrastructure, power, defence, and the capitalisation of banks has enabled PSUs in their respective sectors to grow,” says Kunal Shah, Senior Research Analyst at Carnelian Asset Management & Advisors.
All these could have a positive impact on PSU stocks, while the government’s focus on the rural sector might benefit FMCG, consumer durables, and agri stocks. “With fiscal deficit under control and the big amount coming in from the RBI [as dividend], we can surely see some extra rural-led spending, which will be good for the rural segment of the country,” says Shah. In May, the RBI announced a record dividend of Rs 2.11 lakh crore to the Government of India for FY24.
Vaibhav Porwal, Co-founder of investment services firm Dezerv, says the Budget will strike a balance between enhancing consumption and increasing investments, essential elements for sustainable growth. “While India’s macroeconomic fundamentals are strong, policy efforts shall be directed towards transforming India into a developed economy by 2047,” he says, adding that the capital spending to GDP ratio doubled from FY19 to FY24 as the government prioritised infrastructure investment. He expects government support for infra projects to continue. “We also expect the government to incentivise states and private companies to contribute to the next phase of infrastructure development.”
Hemant Sood, MD of financial services firm Findoc, concurs. He says that the government will look to further boost investments in infrastructure. “The Budget will also be focussed on many sectors like IT-BPM (Business Process Management), semiconductor, manufacturing, and defence, alongside real estate under the Aatmanirbhar Bharat vision and subsequent PLI schemes will make the economy extremely efficient,” he says. That’s music to investors’ ears. @iamrahuloberoi