Budget 2025: Potential Focus On Consumption Has CLSA's Vikash Jain Positive On FMCG

Amid expectations of less focus on capital expenditure in the upcoming budget, CLSA Strategist Vikash Kumar Jain says Modi stocks need to correct more from their elevated valuations. But he is overweight on staple FMCG stocks.

Advising investors to adjust their expectations, Jain said he is expecting very low returns from Nifty this year. In markets, the process of normalisation can be a little longer amid elevated expectations, he told NDTV Profit.

"A large part of the last two years, India was growing higher than potential average growth," he noted. In the long-term, this is not a huge alarm bell but capex stocks can be a little disappointing, according to Jain.

"I still see many Modi stocks at elevated valuation because expectation is high. There needs to be a cool-off for us to get better entry point for multi-year capex story," he said.

He prefers affordable consumption, where expectation is low but he expects some improvement from state election promises and good rain.

Barring that, in the ongoing correction, many stocks are significantly down and some of them can be considered as bottom up opportunity, he noted. Jain is 'overweight' on commodities, staples and banks, but underweight on industrial, IT, and healthcare.

He likes large companies as the less certainty on near term growth is not helpful for mid and small caps, which are extremely elevated on valuations.

According to Jain, the government's target of 4.5% fiscal deficit is a key element of this budget and has already been committed by the government in the last budget.

The government chose to use nearly half of the bounty from RBI's significant dividend, which was nearly half a percent of GDP, to reduce fiscal deficit. Effectively, in FY24, fiscal deficit was 5.8% and is expected to go 4.5% in FY26, which is a big reduction, Jain said.

"There are reasons to expect RBI profits to be strong this year as well, one of them is dollars they sold towards the end of last year," he pointed out. "But we have seen government is not really accounted for large dividends unless they are confirmed."

For Jain, the dividend number is key to watch because if it comes down, revenue will be significantly down and will consequently impact spending space. Modi 3.0 could be different from the second term's capex focus, given that the underperformance in the national election was feedback from voters that rural consumption and job side need to be addressed, he said.

The coalition government also wants the government to focus on politically sensitive areas, Jain said, while noting it is key to see if this consumption part will add to capex or it will further shrink capex.

Jain expects that over the two-year period (FY25 and FY26), the growth in capex to be less than 15% and on an annual basis, it will be in single digit.

The capital expenditure falling 12% YoY till November is a big change and could also hint at the government saying it needs to tighten its seatbelt around fiscal deficit discipline, Jain said.

"Large part of heavy lifting in the capex has been done by the government," he said. The 6% year-on-year capex growth he is expecting this year will require 35% growth in remaining four months.