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How union budget impact sectors in India – a guide for retail investors

Published : January 22, 2019

How union budget impact sectors in India - a guide for retail investors

Budget impact sectors heavily in India. Industries perform mainly on the overall policy and guidelines laid down by the government. These yearly budget from the central government provides the broader guidelines for major sectors in of the country.

These guidelines include total output limits, government soups, financial assistance and etc. The sectors take guidelines from such budget announcements to develop their yearly operating strategies. Hence, the overall performance of companies operating under such sectors directly depends upon the union budget announcements.

Why investors consider budget impact sectors analysis?

As an investor, you must keep track of how the central government plan for overall economic development of the country. Government past performance and future plan on economic development will give you a sense of growth in the country. 

A stable plan for economic growth acts as a catalyst for all the sectors operating within the geography. Moreover, sector performance depends largely on the performance of its constituents. It is true that you do not invest directly into sectors. What you do is you try to pick good performing companies.  So that your money should be in safe hands. Plus your money must also grow with less risk.

Thus, a sound performing sector will give you a strong motivation to pick a worthwhile share of a company within. So proper understanding of union budget is a must.

Now it is clear that the union budget effects various sectors. The effect might result in the increase or decrease of funds allocation to the sectors. Hereby, to start with this let’s invigorate our opinion on the union budget.

“In India, the union budget is the annual financial statement of accounts of the government of India. These accounts are for the preceding and current year. Also, these are estimates of the revenue and expenditure of the coming year.”

Moving forward in the current blog I will cover analysing some of the prominent sectors of India. After going through this blog article you will get a strong conviction for analyzing sectoral allocations in any of the union budgets. Furthermore, you will also be able to link them with your stock market investing. 

In this article, I will be covering power, MSME, IT, telecom, textile and pharma sector. I will be coming up with another blog article to cover more sectors. 

1. Power sector

Over the years, power is seen as one of the most critical segments of infrastructure. Moreover, it is crucial for the growth and welfare of nations. Additionally, note that the power sector is the most diversified sector in India.

There is a rapid increase in the demand for electricity in India over the years. The continuation of economic growth recapitulates to drive electricity demand in India. In India, the sources of power generation are coal, lignite, natural gas, wind, solar, etc.

Now let us look at some facts about the power sector in India that are useful for you as a stock market investor.

A. Facts investor should examine for the power sector in India

Since independence, the government of India believes and focus on “Power for all”. So year by year the capacity of power stations in India is on an increasing trend. To quote as of November ’18, India is having 346.62 Gigawatt (GW) of power generation capacity. 

Now whats there on investment front? Investment from the government itself. The investment in last 20 decades or so since April’2000 to June 2018, has seen a rapid rise. This will be clear from the fact that the foreign direct investment in power sector stands of the tune 14.18 billion US dollar.

The importance of the power sector for the government is evident by the fact that it accounts for 3.64 % of total FDI inflows in India as of now.

Power is for consumption. Whether its an individual like you and me or any industry, everyone needs power. Think about the companies that install, generate and distribute these powers to India. Also, ancillary industries that support the power sector. You will get a sense that how much more potential these companies carry in terms of growth and stability of investments. 

Again to quote, due to various GOI initiatives in the power sector, India global ranking stands at 24 in 2018.  This was 137 in the year  2014. Also according to some estimate, the energy deficit attains 0.7% in 2018. This was 4.2% in 2014.

B. How investors interpret budget impact on power sector?

Power could come from either renewable or nonrenewable sources.  It is a fact that if a country has a policy of purchasing powers then it would lead to higher rates. In such situation such power sector becoming more expensive. On the contrary, if a country focuses on generating power on its own then it proves too profitable. India falls under the second situation. 

Now, how generating power is better than power purchasing?

Power generation gives a long term gains. This will even lead to the rise of share prices of renewable energy like wind power and solar. However, don’t forget to screen the macroeconomic factors surrounding the power sector.

Currently, India is volatile on a host of macroeconomic factors. Factors like oil prices, a weak currency, and worsening government finances. However, power sector stocks as macro concerns have minimal impact on the sector. So this could prove good defensive picks.    

As a retail investor while analysing the budget impact sectors, should focus on watching government investment in the power sector. This is so because the Government is focusing more on power generation through renewable energy then non-renewable one. 

So in the coming years, maybe 20 years the government will work on the further improvement and growth of the power sector. Especially in the renewable part of the power sector, such as nuclear, wind and water.

Thus, as a long term investment plan, you must consider investing in listed stocks in this sector. The reason is obvious. You will get a higher rate to return on your investment. As the sector will grow and mature, your investment will also get ample growth with stability and minimal risks. 

C. How to pick stocks from the power sector in India for your portfolio?

Listed companies from power sector comprise those who are in generation, distribution and their supporting companies. Those companies that provide infrastructure for power sector is also part of it. There are approximately 30 such listed companies. Some like NHPC, NTPC, SJVN are government-run companies. While some like Tata Power, Reliance Power, Adani Power are under private ownership.

While selecting stocks from power sector you must use diversification for minimising the risks. You can mix from government and private companies. At the same time, you also have the option to pick from generation, distribution and companies that provide infrastructure support.

2. Information technology sector

This is a pride for India that Indian IT and ITeS companies have set up over 1000 global delivery centres in about 80 countries across the world. Furthermore, India is also moving towards digitalization. Additionally, India becomes the digital capabilities hub of the World.

According to some estimate around 75% of global digital talent is present in the country. The union budget further allocates more fund to this sector resulting in the growth in the IT & ITeS sector in India.

A. Facts relating to IT sector for stock market investors to note

The revenue expectations from this digital segment comprise of 38% of the global IT industry revenue by 2025. Some estimates global IT industry revenue to reach 350 billion US dollar. Indian IT and ITeS companies enjoy core competencies and strengths. This help attracts significant investments in India over the years. 

When we talk of union budget allocation to the telecom sector, the allocation has doubled in the last few years. The push of the Digital India Programme by the union government is mainly responsible. The central government has come up with the program of the Skill India of which Digital India is a part.

The government of India is spending heavily on boosting the IT sector of India. Further, the main focus of such spending is on enhancing the Indian product not only locally but also globally. This a huge plus for both companies operating under software and hardware components of the Indian IT sector.

Besides the government is also acting to shield IT companies from global competition, within the country.  This is for sure give boost their product locally. For instance, let’s suppose if the government increases the import duty on any of such IT products which have huge consumption in the country. In such a situation, such product from foreign markets will be more expensive. This will help achieve similar Indian product at the competitive edge from its foreign counterpart. This is a huge plus for companies operating under the IT sector umbrella. 

B. How to choose IT sector stocks for investing?

The stocks IT sector are put into two different groups by BSE sector classification. One is IT consulting and the other is IT software products. There are total 80 listing of companies under IT consulting sector. While there are 82 companies listing under the IT software sector.

OFSS, Infy, HCLTech, Mindtree, NIIT, KPIT, etc. are part of IT consulting. On the other hand Nucleus, Tataelxsi, Zentec, Quickheal, Saksoft, RS Software comes under IT software.

While considering stocks from IT and ITeS sector for investing you must consider two things. One its revenue in dollar terms and the other is its revenue forecasts. Most of the good performing companies in this sector have a global presence. So a major chunk of their revenue is from outside India. Hence, they also report their revenue in dollar terms.   

As a stock market investor, you would gain a higher rate in terms of foreign exchange. However, it can be riskier. This is true for companies whose major source of revenue is from outside India. Contrary, the investor investing in Indian company stocks with more revenue from within the country may get a lower rate of return. The risk might also be uncertain. So here also you must diversify for the benefit of risk diversification. And at the same time maximizes your long term investment returns

3. Micro, small and medium enterprises sector

In growth story of India, MSMEs are the protagonists. The contribution of MSMEs to the Indian economy is unparallel. MSMEs are the 2nd largest employers in India. The sector has 45% contribution in manufacturing, 40% in export and 37% approximately to the national GDP.

The government of India with all state governments also recognises the importance of MSMEs in the country’s growth. Therefore, they give special privileges to this sector. Most of the state governments are granting special tax incentives to MSMEs operating in their respective states. Moreover, every state has incentives for funding MSMEs in their states.

Recognising the importance of MSMEs the union government has moderate corporate tax rate policy for it. In the union budget FY 2018-19, there was a lowering of the corporate tax rate from 30% to 25%. This is for the companies with an annual turnover of up to INR 50 crore. This fiscal onwards this benefit is going to extend to companies with annual revenue of up to INR 250 crore. The government intention was to leave MSMEs with a higher investible surplus. This, in turn, will for sure help not only create more gains to investors but also employability.

A. Should you consider MSME stocks in your long-term portfolio?

A tricky question indeed. It is true that from a stock market investor point of view it can be partially riskier to invest in MSMEs. This is because mostly the start-ups which are hardly known in the market forms MSME sector.  However, no risk no gain. At the same time higher the risk, bigger the chances for reward.

As a retail investor, it is good news for you that since 2012 onward you can trade in stocks of MSMEs. Both NSE and BSE have their own platform for MSMEs. They also have the facility for listing of start-ups without IPO.  Moreover, with time, information on such start-ups and MSMEs which are vital for investments is possible now. NSE MSME platform is NSE-EMERGE. While BSE’s is BSE-SME.

However, scrutinizing stocks from this sector will require high experience with stock market investing. Don’t forget that the company with higher turnover could be beneficial. If you consider yourself expert enough to pick a gem from this sector you may proceed. Nonetheless, you can choose a buy and sell strategy for this sector.  Simply because holding the shares of this sector can be riskier for you.

4. Telecommunication sector

Currently, India is the world’s second-largest telecommunications market. India had a subscriber base of 1.17 billion as of now. Further, has also seen strong growth in the past decade and a half. The Indian mobile economy is growing rapidly too. Plus will contribute substantially to India’s Gross Domestic Product (GDP). This is in accordance with the report by GSM Association (GSMA) in collaboration with the Boston Consulting Group (BCG).

A. How government is impacting telecom sector through union budget?

Through budgetary support, the government had a plan for the upliftment of the telecom sector in India in three ways. There is a plan to enable easy market access to telecom equipment. Making a fair and proactive regulatory framework for the proper functioning of the sector. Last but not least, it is ensuring the availability of telecom services to the consumer at affordable prices.

Over the years, through subscriber point of view, the government has done a lot of investment and developments in this sector. Currently, there is 512.26 million internet subscriber in the country and is still growing. The FDI investment was 31.75 billion US dollar in the period between April 2000 to June 2018.

On the revenue front, till 2020 the total revenue from telecom equipment can grow up to 26.38 billion US dollar in India. Furthermore, the internet subscriber in the country can double by 2021. Similarly, the overall IP traffic will get 4-fold. This at a CAGR of 30 per cent by 2021.

These statistical values from various research are important to take into consideration. This is so because the investors should have knowledge of the sector, whether it is growing or declining. All these additionally is not possible with the budgetary support of the union government. 

B. Why a share from the telecom sector is a must in your portfolio?

There are various Indian telecom companies that are at the growing stage. There is a minimal chance to face loss in this sector. As because historically the companies had grown well under this sector. Therefore, this sector is less risky than any other sector. The government has always seen allocating more funds to this sector. The telecom sector is a must in the development of the country.

You have a variety of option to diversify within the sector for risk minimization to optimize long term returns. BSE industry classification put telecommunication sector stocks into 4 subgroups. There are 13 listed companies who manufacture telecom equipment in India. Five manufacturing telecom cables. Seven listed telecom services providers. And eight other telecom services provider.

5. Textiles sector

The Indian textile industry is one of the major sectors of the Indian economy. It contributes almost 14% of India’s industrial production, 4% of National GDP and almost 17% of India’s export earnings. Textiles sector is a labour intensive sector. So union budget gives special funds allocation to this sector.  The textile sector in India provides jobs to around 45 million people approximately.

The budget allocation to the textile sector is on rising. In comparison to the previous financial year, the budget 2018-19 has INR 7,148 crores of allocation. This accounts for 14.7% increase from the previous year allocation to the sector. The rate of growth in allocation for the fiscal, however, is less than half of the increased allocation. This is more than 30% to INR 6,226.5 crore in 2017-18.

A. How government support and union budget helping the textile sector grow?

Under the GST regime, the government is allocating higher funds to the textile industry. Just to fulfil the requirements of duty drawback and refund of state levies (ROSL). The Indian textile industry has a number of segments. Segments such as cotton, silk, woollen, readymade, jute, and handicraft. However, it is skewed towards cotton.

It has come of age and is gaining acknowledgement on the world platform with all government budgetary support. This is aided with an excellent textiles manufacturing base and easy availability of raw material. India is self-sufficient in cotton, being the second-largest producer in the world. This provides India with a competitive edge worldwide in terms of the cost of the raw material.

Prospect of cotton spinning units is also improving. The main reason is moderation in cotton prices. Government is doing everything to maintain the raw cotton prices. There is also favourable demand for cotton yarn from China.

Coming on to the blend fabrics. The growing usage of blend fabrics is the main driving force behind the increasing demand for man-made fabric (MMF). This is to meet the increasing demand for the apparels, home textiles and technical textiles.

B. What to keep in mind before selecting stocks from the textile sector?

You should always keep in mind that there is every chance for the increase in input prices. This may limit the envisaged growth prospects of the industry. Input prices are increasing owing to the increase in crude oil prices and the stabilization of cotton prices.

However, the good thing is that the US and EU account for more than 70% of Indian apparel exports. But at the same time, the concerns over the economic health of these countries would further put pressure on the Indian apparel exporters. However, revival in domestic economic growth is likely to improve the apparel demand.

Furthermore, the growth in the demand from the domestic market will also surge. Especially in demand from apparels and home textiles segments.

6. Pharmaceutical sector

India is the largest provider of generic drugs globally. Indian pharmaceutical industry supplies over 50% of global demand for various vaccines. Almost 40% of generic demand in the US comes from India. Also, 25% of all medications in the UK is from Indian companies.

To grow in this sector or industry, India has a large pool of scientists and engineers. They possess the good potential to steer the industry ahead to a higher level. Presently over 80% of the global usage of the antiretroviral drugs to combat AIDS comes from the Indian pharmaceuticals sector.

All these facts and figures are sufficient to understand that this sector has a lot more growth potential hidden.

A. How budget impact pharma sector?

In 2017, the government earmark 33 billion US dollar to the pharmaceutical sector. With the help of this government support, the Indian pharmaceutical industry may expand at a CAGR of 22.4 % soon. It may reach 55 billion US dollar in between 2015-20. Such budget support aids India’s pharmaceutical exports to reach 17.27 billion US dollar in the financial year 2018. 

Pharmaceutical exports from India include bulk drugs, intermediates, drug formulations, biologicals, Ayush & herbal products and surgical.

The favourable environment due to such huge budget allocation is promoting Indian pharma manufacturers to come up with new drugs year after year. This is evident from the fact that Indian companies achieve 304 Abbreviated New Drug Application approvals from the US Food and Drug Administration in 2017.

Furthermore, India accounts for around 30% (by volume) and about 10% (value) of the global pharma industry.

Besides, biotechnology industry in India comprises of bio-pharmaceuticals, bio-services, bio-agriculture, bio-industry, and bioinformatics. This segment of the pharma industry in India may grow at an average growth rate of around 30% a year. Moreover, it may also reach 100 billion US dollar mark by 2025. This is in accordance with some research estimates.

B. How are health conscious Indians helping pharma industry growth?

Indians are growing more and more health conscious. Some estimate India to become one of the top 10 countries in terms of medical spending. Further, medicine spending in India may grow by 9-12% over the next five years or so.

Moving further, better growth in domestic sales also depend on the ability of companies. Abilities to align their product portfolio towards chronic therapies for diseases. Diseases such as anti-depressants, anti-diabetes, cardiovascular and anti-cancer. These are the diseases that are rising due to the changing lifestyle of many Indians.

Adding to this the Indian government is also taking many steps to bring down healthcare expenses and reduce treatment costs.

Moreover, speedy introduction of generic drugs into the market will also benefit the Indian pharmaceutical companies. Furthermore, this is the core focus of the budget and government as well. In addition, the thrust on lifesaving drugs, rural health programmes, and preventive vaccines also foresee well for pharmaceutical companies.

C. Select stocks judiciously from pharma and healthcare industry

There exist a laundry list of pharma and healthcare shares. The only thing you need to do is to select with high growth potentials. Also, you need to analyse union budget impact on pharma sector in details. There are almost 86 big and small listed company in the pharma sector in India. Almost 10 different companies are there for you in the hospital and medical services sector.

“If you are wondering how to determine a sector to pick a stock for investing, this blog is for you –  

Sector rotation – Some important lessons for stock market investors. “

Why budget impact sectors analysis important for forming investing strategies?

Hereby, concluding the write-up, the union budget is an event which can help predict the stock market for investment. The budget impact sectors in various possible ways. Almost all sectors get an impact of union budget announcement every year.

The budget is a powerful tool in the hands of government to control countries economic sources. At the same time, it is a powerful tool at the hands of investors too. 

Besides deciding on long term investing, you have an opportunity to earn super short term profits. However, in case, your’s expectation does not meet the budget plan then there would also be the risk of losses. So you need to be very careful if plans to invest around the budget day

The investors are at lesser risk when they tend to invest for long term in these sectors. One of the main reason is that the government is focusing on promoting and developing these sectors. So you need the budget impact sectors analysis every year.

For instance, consider the power sector. The plan of government is to provide benefit to the people around India. This includes all the villages and thus, is a great development for this sector. Same with IT and telecom sector the government is allocating huge funds to enhance the growth of India.

Lastly, you find that these sectors are the main focus of the government too. Hence, you can minimise your stock market investment risk. The gain or the rate of return can be higher as compared to another sector. Only things that you have to worry about or keep an eye on the tax rates, and imports and exports.  Because this would decide whether the Indian market is favourable or not for a particular sector.

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