India Inc results may mirror govt expenditure in upcoming qtrs

Break-up of overall expenditure shows most of the gains will be in construction and infra

The Interim Budget is expected to impact corporate performance in the forthcoming quarters. The sectoral break-up of government expenditure, however, suggests most of the gain will accrue to companies in construction and infrastructure with small benefit for consumer goods firms.

Government expenditure is projected to grow 6.1 per cent year-on-year in FY25 over the FY24 Revised Estimate. However, most of the upside in government expenditure next financial year will be in capital expenditure such as public investment in transport and other physical infrastructure.

In contrast, the Budget projects a contraction in revenue expenditure in FY25 excluding interest payments on public debt.

According to market analysts, the Budget proposals will translate into a relatively good showing by capex- and investment-related companies in FY25 while consumer companies could be laggards.

“It will be a continuation of the current trend wherein consumer goods makers such as Hindustan Unilever, ITC, and Asian Paints are struggling with little or no volume growth while capex-related companies such as Larsen & Toubro would outperform with faster growth in revenues and profits,” said Dhananjay Sinha, co-head research and equity strategy at Systematix Institutional Equity.

Others say the Budget may not have a material impact on corporate earnings.

“From the market perspective, bond markets may cheer steep fiscal consolidation, although from an equity market standpoint, we don’t think the Budget will materially alter the earnings trajectory in the coming year,” said G Chokklingam, founder and chief executive officer, Equinomics Research.

In the past 12 months, fast-moving consumer goods majors such as Hindustan Unilever and ITC have struggled with low single-digit growth in net sales and net profit and they have been laggards on the bourses.

In comparison, Larsen & Toubro, Maruti Suzuki, and Bajaj Auto have seen strong double-digit growth in net sales and net profit. fuelling a rally in their share prices. (See the adjoining chart.)

The central government’s revenue expenditure ex-interest payments is estimated to decline by 3.9 per cent Y-O-Y in FY25 to ~20.78 trillion from the FY24 Revised Estimate of ~21.63 trillion.

Total revenue expenditure ex-interest payments in FY25 would be the lowest since FY20. Revenue expenditure includes salaries and pensions, general establishment expenses, subsidies and grants, and transfer.

For comparison, government expenditure is expected to grow 7.1 per cent Y-O-Y in FY24 while revenue expenditure, excluding interest payments, is expected to decline by 2.5 per cent Y-O-Y, according to the Revised Estimates.

A cut in revenue expenditure would translate into lower income in the hands of the people and that could negatively impact overall consumer demand.

The impact would be higher for families in lower-income brackets, whose income and consumption are more dependent on subsidies and other public expenditure.

Higher allocation for capital expenditure is, however, expected to expand jobs and employment in the construction and allied sectors, which would partly compensate for a cut in revenue expenditure.