Mumbai, February 03, 2025: Emkay Global Financial Services in its latest India Strategy Report – FY26 Union Budget – Reinforces the pivot to consumption, stated that the FY26 Union Budget tax cut is set to boost net incomes for India’s upper middle class by 2-7%, reinforcing their view of a consumption recovery in the second half of CY25. Emkay anticipates a market shift from industrials and manufacturing toward consumption, with Consumer Discretionary as a preferred play on this theme. While staples and financials also stand to gain, both sectors face a disconnect between growth and valuations. Accordingly, Emkay is rebalancing their model portfolio by increasing allocations to Consumer Discretionary and Financials, funded by a reduction in Energy.
Government’s focus on reducing tax
The government plans to reduce income tax incidence for individuals earning below Rs 2.5 million, effectively increasing net incomes by 2-7%. This translates to a total stimulus of Rs 1 lakh crore (0.3% of GDP). While this alone may not be sufficient to fully counter the consumption slowdown, additional tailwinds are emerging. Employment trends are improving, and Emkay anticipates a rebound in retail loan growth in FY26, particularly in the unsecured segment. The tax cut also provides a modest boost to the overall credit environment, supporting retail deposits, credit capacity, and asset quality. However, a key risk lies in the optimistic assumption of 15% YoY (BE) growth in personal income tax collections.
Focus on fiscal consolidation
The government remains committed to fiscal consolidation, targeting a budgeted estimate (BE) of 4.4% of GDP. However, this has come at the expense of capital expenditure, with growth slowing to 10% YoY (BE/RE) for FY26, a sharp decline from the 31% CAGR seen during FY21-24. Emkay believes capex as a share of GDP is nearing its peak, as neither state governments nor corporates are likely to fully compensate for the Central Government’s pullback. That said, the outlook isn’t entirely bleak—steady 10-12% multi-year growth continues to provide a fundamental boost to the economy. Power and Real Estate emerge as standout sectors in the capex narrative. A potential upside lies in the Rs 10 lakh crore, five-year asset monetization plan, which could unlock significant resources for another capex cycle. However, with just Rs 40,000 crore planned for FY26, this remains more of a long-term catalyst.
Market view
The budget does not change our overall view of the market. We stick with our Dec-25 Nifty target of 25,000, based on a conservative 21.1x trailing P/E. W
Model portfolio changes
Emkay Global sees Consumer Discretionary as the best way to play the consumption theme. The sector is going through a cyclical downturn, so a recovery will benefit companies disproportionately. Valuations are more moderate (PER of 23x on FY26) than for Staples, especially when adjusted for growth.
Stock adjustments include adding Maruti and Paytm, while removing ONGC and reducing BPCL.
Emkay’s top picks for 2025 are:
- Large Caps: Lupin, Zomato, Tata Motors
- Mid Caps: IndusInd Bank, Escorts, One97 Communications
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- all Caps: StoveKraft, Metropolis Healthcare, Quess Corp