MidCaps and SmallCaps will outsmart Large Caps in 2020, says VK Sharma of HDFC Secs

 NE BUSINESS BUREAU

AHMEDABAD, JAN 21

For the Calendar Years 2018 and 2019, the Mid and the Small Cap indices have been gross under performers. While the Nifty has gained 3.15% in 2018 and 12.02% in 2019, the Mid and the Small Caps have only given losses. V K Sharma, Head PCG & Capital Markets Strategy. HDFC Securities predicts the Mid and the Small Caps will do better than the Nifty in 2020.

 In the Calendar Year 2020, the Mid and the Small Caps will do better than the Nifty. The reasons are many:

1. Two years of continuous and massive underperformance have resulted in valuations differences that are now very attractive for any investor.

• The primary reason for their underperformance to begin with lies with two policy changes that happened in 2018. a) Bringing in of LTCG b) Changes in the mutual fund Categorisation

If these issues are revisited, the mid and the small caps will soar. We are already seeing that happening

 The Nifty Smallcap Index has formed a bottom in August 2019 and the monthly advance-decline ratio has been positive since September of 2019 and is continuing.

 Fiscal Deficit

Fiscal deficit in the first eight months of FY20, stood at 15% above target, mostly driven by weak revenues collections.

Non-tax revenues like RBI’s dividends, partial payments by telecom companies following a court ruling, and divestment proceeds are still giving high hopes.  But still, we feel that the government is likely to miss a fiscal deficit target of 3.3% of GDP because of the recent cut in corporate tax rates and slower than estimated divestment.

 We expect the FY20 Fiscal deficit to widen to 3.5-3.7% compared to 3.3% budget estimate and FM can revise FY21E Fiscal deficit target to 3.3-3.5% compared to the previous 3%.

 Insurance: a) Potential increase in FDI in insurance companies to 74% from 49% currently. b) Potential caps on ownership by banks/NBFC in insurance companies to 30%/50%respectively.

Income Tax: a) Individual taxpayers are hoping for some beneficial tax reforms in the upcoming budget. b) Relief for individuals in taxation could be by rationalizing tax slabs or raising exemption limits. c) The Direct tax code panel has recommended sweeping changes to the personal income tax rates, with the creation of five slabs versus the current three: Rs 2.5-10 lakh: 10 percent (with a full rebate up to Rs 5 lakh) Rs 10-20 lakh: 20 percent Rs 20 lakh-2 crore: 30 percent Rs 2 crore plus: 35 percent. d) The reduction in Personal income tax by anyways could spurt consumption which could be beneficial for Consumer Sector, Financial Services. e) Any change in the Dividend Distribution Tax (Effective tax rate 20.56%) or if the duration of long-term capital gain is increased or abolished, then it could be a boost for India Equity Markets.

Current Tax slabs & rates

Income up to 5 lakh will get a rebate of Rs 12500. So effectively up to Rs 500000 Income, there is no tax.

Sector-wise Expectations

• Agriculture: a) The government is considering decontrolling urea by bringing it under the NBS regime, and that it is also considering transferring fertilizer subsidy directly to farmers (DBT). b) Given the fiscal constraints being faced by the government, allocations to certain schemes may be cut – e.g., the PM-KISAN scheme, in which the number of beneficiaries so far has been lower than expected.
• Banking and Financials: a) Further measures to improve liquidity for NBFCs since the Partial Credit Enhancement scheme has not worked well so far. b) Notifying time frame for new IBC rules for financial services companies.
  • Cement: Increase in budget allocation for infrastructure projects and PMAY. With Housing for all targets by 2022 coming closer allocations for PMAY may increase sharply. We expect -increase in spending to boost cement demand growth for FY21 to 6-7% against 1-2% for FY20.
• Infrastructure: a) The budgeted amount allotted to metro projects should be more than INR200bn, up 10% over REFY20 b) The overall railway capital expenditure could be pegged at INR1.74trn. c) Expenditure on roads over INR 724bn, up 10% over RE FY20. d) Expect an announcement of Atal Distribution System Improvement Yojana (ADITYA) – scheme involves cutting of losses. Centre to provide funding of up to INR 1.1 trillion which will work in three phases till 2024. e) Focus to reduce overall logistics costs.
• Housing: a) Expand the definition of affordable housing by either carpet area and ticket price. b) Increase in deduction limit for home buyers. c) Improving liquidity in the real estate sector by relaxing criteria of projects for 250bn AIF fund