Wind changing from capex related themes towards consumption related theme: Ravi Dharamshi

Ravi Dharamshi, CIO, ValueQuest Investment Advisors, says real wages remain below pre-COVID levels, highlighting the need to support struggling consumers, which this Budget aims to address. He hopes this will stimulate growth without disrupting the capital expenditure cycle. While many focus on the central government's capital spending, the private sector's investment and the real estate market are crucial for sustaining economic momentum.

Budget, one event risk is over. The markets have clearly pivoted in favour of consumption and capex is taking a back seat. How should the market read into this budget based on today's stock reaction?
Ravi Dharamshi: The way I look at this is that the Indian economy has been struggling, especially in the last quarter. And it became very evident that the moment the central government capex stopped for a few months because of an election-related moratorium, suddenly the GDP dropped by 2%. That tells you that we had been firing only one engine of growth, which was the central government capex.

Now, within the capex itself, the other two big engines are private capex as well as household capex. Household capex means real estate. Those two have not been firing yet. And on the consumption side, of course, there has been a lot of struggle post COVID. We all know that it was the top end of the economy that was doing well or an asset owner has done well. Income earner has not done so well.


The real wages are still pre-COVID level, below pre-COVID level. So, there was a need to provide relief and put some money in the hands of the struggling consumers and I think this Budget has done just that. So, from the market's perspective, I am hoping that this ignites one more engine of growth and not at the cost of the capex cycle. Though a lot of people pay a lot of emphasis on the central government capex number, what actually matters is the private capex and the real estate cycle.

The broad basing of the real estate cycle and the private sector capex cycle is what will determine whether the momentum in the economy continues or not. So, from that perspective, I am hopeful that the Budget has done enough to sustain the momentum in the economy or revive the momentum in the economy to some extent.

Do you think after the Budget, the narrative weans out from capex related themes or do you think it will still continue to be that decadal structural story because one did not see a whole lot when it came to defence, railways, infrastructure, or at least not as per what the market was expecting maybe?
Ravi Dharamshi: So, yes, probably the market expectations are running high, the valuations are running high. So, from that perspective, there can be some consolidation or correction in the capex related theme. However, I just would like to point out that there are certain sectors which are heavily dependent on central government capex, which is like defence, railway, maybe roads. Those are the sectors which are more under pressure, but there are other private sector capex related sectors which can actually continue to do well.

So, there is a need to segregate within the capex cycle also. There is going to be a change of hands in the capex cycle from the central government towards the private sector and there is going to be a broad basing of the real estate from the premium end to the more mass and lower end of the economy. So, those are two transitions that I am looking forward to over the next 12 months.

Let us take our conversation back and this is something which you prompted us to look at where the government is moving and just buy those. The government post 2021 started talking about capex. Defence did well, railways did well, solar did well, energy did well. Now, the government is saying I am going to shift towards consumption. Is it time to reach into consumption stocks? It may not be FMCG, it could be travel, it could be hotels, it could be Zomato, it could be white goods because government is thinking differently. Is it time to act differently as a fund manager?
Ravi Dharamshi: I would definitely say some amount of exposure if the portfolio has not been showing some amount of exposure to consumption, then this is the time to be adding. We have incrementally been doing just that. We have been adding some names on the quick service restaurant side. We have added some names on the small ticket consumption items.

But it has been incremental for us till now and I would still keep it incremental for the moment because I am yet to fully assess the impact of this. One thing that bothers me in this particular budget is that despite this rebate/exemption given up to Rs 12 lakh, they are factoring in a 15% growth in direct taxes. Now, I mean, I fail to understand where that money is going to come from.

So, if it is going to come from somewhere else, then probably that pocket might suffer on the consumption side. So, early days to judge, but clearly the wind seems to be changing from capex related themes towards consumption related themes.

I will talk about the macro backdrop. Here, the macro backdrop has been that up until now, whatever the government has promised in fiscal deficit, tax assumptions, have all been met very handsomely. For the first time, everyone is saying that the tax assumptions for next year are quite aggressive, given that you will be spending less and the size of the economy has become higher. Are we in for some disappointment on that front?
Ravi Dharamshi: That is what I am looking forward to, what exactly is going to be announced in the Income Tax bill next week or within a week, whatever the finance minister has proposed. I need to see what exactly is coming up. In the name of simplification, I hope it is not more of taxation. So, those fears are not yet fully settled. Some doubts are still creeping in where that tax revenue is going to come from. Honestly, it is too early to pass a judgment, but that is where my worry or that is where my questions lie.

ET Now: We have seen a carnage in mid and smallcap stocks. We have seen almost a bloodbath in SME and IPO dominated stocks. Is the selling overdone? Do you think the market is nearing a painful bottom?
Ravi Dharamshi: The way I look at it, the reason for the slowdown was, the government kept the fiscal very tight, other was RBI kept the liquidity and regulation very tight. So, on all these aspects, we are beginning to see some kind of leeway. The fiscal still remains 4.4%, but at least there is some shift and some relief for the middle class and consumer, so that is good.

On the RBI side, we have already seen some actions taken on easing the liquidity front. But on the regulatory front, we still need to see and maybe the monetary policy that is scheduled next week should give us more insight into that. If those things are to happen, the intent of the government seems to be to maintain the growth momentum and not to be too hawkish or too much towards inflation or managing the balance sheet.

From that perspective, correction is what this is. It is unlikely to get too much deeper unless we present a reason for the markets to do that. The worry still remains internationally, whether whatever action that President Trump is taking will result in any kind of harm to Indian businesses or not. If that is not the case, then I would believe that this correction is pretty much done. I mean, I cannot rule out that one more round of selling or something, but I do not think we will be crashing in a big way from here.