India's top investors back Modi budget on infrastructure drive

[MUMBAI] Prime Minister Narendra Modi's first annual budget granted India's biggest money managers their wish: a boost for manufacturing and an increase in funding for roads, ports and power plants.

Spending on infrastructure will increase by 700 billion rupees (US$11.3 billion), while the nation's railways, roads and irrigation companies will be encouraged to raise money by selling tax-free bonds, Finance Minister Arun Jaitley told lawmakers on Saturday. He also announced a cut in corporate tax and a reduction in duties on raw materials for domestic manufacturing as part of a package of measures to bolster Asia's third-biggest economy.

ICICI Prudential Asset Management, Reliance Capital Asset Management and SBI Funds Management welcomed the effort to shift funding toward growth-boosting measures as India's benchmark S&P BSE Sensex index climbed in a special budget-day trading session on Saturday. While Mr Modi delivered a wider deficit projection than he had targeted earlier, Indian money managers say they can tolerate the fiscal shortfall if cash is spent to jump-start investment.

"This budget reaffirms our faith in the economy," S Naren, chief investment officer at ICICI Prudential Asset Management in Mumbai, which oversees US$22 billion as India's second-biggest asset manager, said in a phone interview on Saturday.

Mr Naren favors infrastructure-related shares. The S&P BSE India Capital Goods Index, which includes Mumbai-based engineering firm Larsen & Toubro and the Indian unit of Siemens, reached a seven-year high on Friday.

Mr Modi's nine-month-old administration had already scrapped diesel subsidies and slowed increases in state-assured crop prices to cap a subsidy bill that rose fivefold during the past decade. He has also pledged more than US$24 billion to unclog transport links and build more cities, measures that have sent the Sensex index to the world's second-biggest gain among major markets during the past 12 months.

Subsidies are set to fall to 14 per cent of total spending in the 12-month period starting April 1, from 16 per cent this year, with spending on infrastructure rising to 14 per cent from 11 per cent, Jaitley said in his address to lawmakers in New Delhi on Saturday.

Spending on roads, ports and power plants will climb 25 per cent from the amount actually delivered in the year ending on March 31, Jaitley said. The government will be left with a budget deficit of 3.9 per cent of gross domestic product, higher than a previous goal of 3.6 per cent.

The measures will help stoke private investment, which fell to 8.5 per cent of GDP in 2013, the lowest in government data going back to 2005, according to Navneet Munot, chief investment officer at SBI Funds Management.

"Industrials would be in focus on reviving investment cycle," Mr Munot, who helps manage US$11.8 billion, said in an e- mail interview on Saturday from Mumbai. "Credible budget numbers and the push for infrastructure development, instead of populist spending, are key positives." SBI Funds has overweight positions in industrial and consumer discretionary stocks, he said.

While the Sensex posted its first budget-day gain in four years on Saturday, an absence of "immediate triggers" in the finance minister's speech may disappoint the market in the near term, according to Tushar Pradhan, the Mumbai-based chief investment officer at HSBC Global Asset Management, India. Any decline in shares after the budget is a buying opportunity, he said.

'High Expectations' The Sensex trades at 16.5 times estimated earnings for the next 12 months, a 15 per cent premium over the five-year average, after rallying 7 per cent this year, data compiled by Bloomberg show. The gauge changed direction at least 12 times after the minister concluded the almost 90-minute speech, and ended up 0.5 per cent. ITC, Asia's second-largest tobacco company by market value, tumbled the most in seven years after the budget proposed raising taxes on cigarettes by at least 15 per cent.

"Market expectations were very high, and one or two stocks pulled down the Sensex due to company-specific news," Sunil Singhania, head of equity investments at Reliance Capital Asset Management, India's third-biggest money manager with US$21 billion in assets, said by phone from Mumbai. Reliance is "positive" on cement makers and non-state banks after the budget, he said.

There's enough in Modi's proposals to lure overseas investors, according to Ashburton Investments. Foreigners have poured more than US$9 billion of into local stocks and bonds this year after an unprecedented US$42 billion of purchases in 2014, data compiled by Bloomberg show.

"The budget will convince some foreign investors who have yet to join the party to finally seriously consider India," Jonathan Schiessl, head of equities at Ashburton in Jersey, Channel Islands, which manages US$12 billion, said by e-mail. The fund has had "heavy overweights" in financial and industrial stocks for more than two years and sees no reason to change, he said.

BLOOMBERG