Short Call: Budget Watch, Agri-Credit Risks, Base Metals Dip, Tata Elxsi, Lupin, Ambuja Cement

Balancing fiscal prudence with the needs of the lower and middle classes, increasing capital expenditure while supporting farmers, and boosting welfare spending subtly, Finance Minister Nirmala Sitharaman's upcoming Budget 2024-25 is highly anticipated.

Investors are on edge, as the government may need to navigate the demands of coalition partners, who have so far been cooperative. On June 4, equity benchmarks fell over 8% amid fears that NDA 3.0 might lose their firm grip on policymaking. Initial concerns that the government might shift towards welfarism following the sub-par electoral verdict were quickly dismissed.

The Budget will be the first indication of whether coalition politics will influence policymaking. Despite various concerns, the market has thrived due to consistent domestic liquidity flow. Even if the Budget disappoints, it is likely that bullish investors will find a new narrative to maintain market momentum. However, investors should also be cautious, as high valuations have significantly reduced the margin of safety.

Agri credit

Agricultural credit has been expanding at a rate exceeding 20% in recent months, surpassing overall bank credit growth by 400 basis points and now making up over 13% of total bank credit, according to Citi analysts Kunal Shah, Dipanjan Ghosh, and Yash Gujarathi. However, they caution that this rapid growth may not be entirely positive.

Historically, periods of swift agricultural credit growth, such as in FY08-09 and FY15-16, have been followed by increased stress in the sector within 12-24 months.

Commodities

Funds and speculators have scaled back their bullish positions on LME base metals due to a lack of fundamental support for a significant price increase, according to a report by Yes Securities' Hitesh Jain. Despite ongoing supply constraints from mines for several metals, spot premiums remain low, and exchange inventories are rising amid weak demand conditions in China, Jain notes.

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Conversely, speculators remain bullish on precious metals, driven by signs of a slowing US economy and expectations surrounding the Federal Reserve's upcoming rate cut signals.

Tata Elxsi (₹6,960, -2.2%)

Shares slipped as analysts turned bearish following a 3% decline in net profit for the first quarter.

Bear Case: Shifting dynamics in the automotive sector, rising competition, and moderating demand are prompting a focus on profitability and reduced spending. The company's healthcare segment experienced a downturn due to a delay in the renewal of some projects with a major customer.

Bull Case: A robust deal pipeline, sustained growth in the transportation sector, new customer acquisitions, and business expansion with strategic customers across various sectors could drive growth in Q2 FY25.

Lupin (₹1,819, -0.4%)

The stock ended a 5-day gaining streak.

Bull Case: U.S. sales surged 34% year-on-year in FY24 due to regulatory improvements and traction in the inhalation portfolio. These sales are projected to grow at a 9.7% CAGR over FY24-26E, reaching $981 million. The launch of gSpiriva and export incentives boosted margins to 19% in FY24.

Bear Case: Growth in India was subdued due to the discontinuation of in-licensed brands. Price cuts and limited market share improvements (30-35%) are expected in FY25-26E. Additionally, competition in Albuterol may impact U.S. sales for a few quarters. Current valuations are considered pricey.

Ambuja Cements (₹678, +1.95%)

Nomura issued a double upgrade to 'buy' for the stock.

Bull Case: According to Nomura, there is significant potential for inorganic growth, industry-leading volume growth, and aggressive capital expenditure, which are major growth drivers. Recent acquisitions have provided entry into new markets, offering opportunities for market share and capacity expansion.

Bear Case: An extended monsoon, particularly in South India where the company is the third largest player, poses a risk. Additionally, if the Penna acquisition does not go through, it could significantly impact the company's earnings growth and market share expansion.

Also read Budget Snapshot: Sustained government expenditure could aid cement sales growth