The fear of hike in taxes was very real in the equity markets before the Budget. There was fear of possible increase in securities transaction tax (STT), short-term capital gains tax, time period to determine long term capital gain, etc.
The Budget put all such fears to rest. And the market celebrated with the Sensex rallying by 570 points in two days. “No change in capital gains tax is positive for markets,” says E.A. Sundaram, ED & CIO-Equities, DHFL Pramerica Mutual Fund. Since the time period for long term capital gains remains at 1 year, capital gains from equity and equity oriented balanced funds will remain tax-free for investors if the holding period is more than a year.
The holding period of debt funds was also not brought down from 3 years to 1, leaving equities with the tax edge. But equities are not a good bet for tax advantages alone.
Interest rates on fixed income opportunities are down. The 5- year FD rates are only around 7% and may fall further. The rates on long duration papers are down. With debt becoming less attractive, equity remains the best way to create wealth. Let us now look at sectors positively impacted by the Budget.
Rural economy
There was a lot of focus on agriculture and rural infrastructure, which will spur rural income and consumption. Should one bet then on FMCG stocks to benefit from this? “While Budget will help rural consumption, FMCG space is already fairly valued,” says Amar Ambani, Head of Research, IIFL.
Affordable housing
The government has provided infrastructure status to the affordable housing segment. However, that does not necessarily mean you bet on real estate companies that are into affordable housing. This is because most construction companies are plagued by unsold inventory, governance issues, etc. “Instead of construction companies, it is safer to bet on housing finance companies in the affordable housing segment.
This business is expected to grow 20%-30% in the next 3-4 years,” says Ambani. “While most small housing finance companies will benefit, we are bullish on Can Fin Homes and LIC Housing Finance,” says Dharmesh Kant, Head, Retail Research, Motilal Oswawl Securities.
Infrastructure
The FM repeated the target to achieve 100% rural electrification by May 2018. “Focus on power transmission is good for companies that are doing EPC in this space like KEC International,” says Ambani. What about PSU majors? “Since the price of Power Grid has already rallied significantly, not much opportunity is left,” says Deepak Jasani, Head of Research, HDFC Securities.
A big amount has been provided for railway safety, so should one bet on rail infra companies? “Rail infra stocks usually run up to the railway budget, remain in the side-lines after it and come back only close to the next budget,” cautions Ambani. The government also wants to develop the oil and gas space. It has cut basic customs duty on LNG from 5% to 2.5%.
“In addition to the sop, companies like Petronet LNG and Gail are on a structural growth path due to increased demand for natural gas,” reminds Jasani. The government also wants to merge existing companies and create an integrated PSU oil major. Though it is a good move directionally, there is not much investors can act upon.