On nominal GDP growth of 12-13%, corporate profit should grow around 15%. Since the stock market is a slave of earnings, it should track corporate profit growth – i.e., 15% returns. Now, 15% growth over 10 years is four times. Thus, the Sensex should grow from 50,000 to 200,000 (50,000×4)!
Budget 2022 does not disturb this narrative. It factors in nominal GDP growth of 12-13%, exactly in line with my expectations. In fact, it’s a huge positive on the supply side. In FY22, the government’s capex growth is a high 28%. It is reasonable to infer that this is a key driver of 17% profit growth for Sensex companies in H1, FY22. Now, the budget provides for capex growth in FY23.
This continuity in capex is most likely to be reflected in corporate profits as well – i.e., growth of around 17% in FY23. This, too, fits very well into my Sensex 200,000 narrative!
The budget is a calculated bet on the virtuous capex cycle – government capex crowding in private capex. The problem is Covid and its aftermath. The last year or so has seen a K-shaped recovery in the economy. While a few sectors have almost recovered to pre-Covid levels, some others – especially SMEs – are reeling from the post-pandemic disappearance of demand.
Budget 2022 could – rather, should – have put in place a Plan B, i.e., demand-side management. The government should have topped up tax buoyancy with an aggressive asset monetisation plan to provide demand boosters, both direct and indirect. This would have opened a window for demand-led private capex as well.
That said, how should investors play Budget 2022 as part of the Sensex 200,000 journey? My favourite bet is banking – an economic recovery is a double-positive for the sector: Higher credit offtake and lower credit cost, boosting profits. Budget or no budget, I remain very bullish on Indian IT. Global digitisation is like yet another Y2K moment for the sector. The capital goods sector is definitely a beneficiary of higher demand, but its profitability could be hit by raging inflation, especially in global commodities. So, beyond banking and IT, I think it’s a market for stock-picking rather than sector-sweeping.
