Day 1: Economic Stimulus Series II

In the backdrop of growing demand for a larger stimulus package to tide over the economic fallout of the Covid-19 crisis, FM announced the first tranche of Rs.20 Tn ‘Atmanirbhar Bharat Abhiyan’ economic stimulus package.

As we have highlighted yesterday, FM announcement of ~Rs.6.0 Tn of stimulus package is largely in the form of loan, liquidity, guarantees and actual cash spending by the Government is likely to be much lower at ~10% of the headline number.

This could be +ve from Fiscal Deficit perspective. Nonetheless, these measures are likely to result in higher spending from FY22, depending on the servicing of the guaranteed credit. We don’t see any issue on the funding of this economic stimulus package, as GOI has already raised its borrowing program by ~200bps of GDP few days back plus the hike in auto-fuel duties would will another 80bps to its revenue kitty.

Positive for NBFC/HFCs/MFIs: The measures announced for NBFCs are likely to translate into drop in credit spread. The special liquidity scheme of Rs.300 bn to make both primary and secondary market purchase of investment grade debt paper of NBFCs/HFCs/MFIs which will then be fully guaranteed by GOI and Rs.450 bn Partial Credit Guarantee Scheme 2.0 for lower rated -AA paper and below including unrated paper, offering first loss guarantee of 20% to lenders (10% under earlier package) along with wider scope (unrated paper included vs excluded earlier) are likely to reduce pain for this sector.

Positive for MSME: GOI also announced a 100% credit guarantee on ‘Principal + Interest’ for emergency credit lines offered by banks and NBFCs to MSME units (Rs.3.0 tn allocation). As per the CIBIL data, MSME has loan outstanding of Rs.15 tn for less than Rs.25 cr loan category. Hence, this Rs.3.0 tn assumes ~20% of credit costs and provides much needed liquidity to this segment.

Positive for Power generating companies: Rs.900 bn relief package where PFC/REC would be securitising the receivables of DISCOMs to pay the outstanding dues to GENCOs like NTPC, Power Grid. Apart from this, Central Power PSUs will be offering rebate to DISCOMs for these payment (likely at 1.5-2.0% from past exp) which has to be passed to industrial consumers. These will ease cash flows for NTPC and Power Grid as the burden shifts to PFC and REC’s balance sheet.

Not enough for Real Estate sector: Real estate sector was hoping for some big announcements which did not come and hence -ve for them. Covid-19 to be treated as a ‘force majeure’ under RERA and hence extension of registration and completion date Suo Moto by 6 months. This could help the smaller developers but this sector is facing challenges on multiple fronts and was expecting more relief on the lines of tax breaks (GST and stamp duty) for demand revival.

We could see some future announcements that could be +ve for consumption stocks like FMCG, Consumer Durables, Two wheelers, Construction, Road, Cement and NBFC.

Apart from this announcement, there has been some changes in the definition of MSMEs like limits on investments revised upwards, additional criteria based on turnover and differentiation between manufacturing and service units to be removed.

FM will come out with package details for other sectors as well, in near future. Looking at the details, we find comfort on funding part of the economic package, as actual outflow from government kitty is likely to be much lower than the headline number. GOI has already raised its borrowing program by ~200 bps of GDP few days back along with the hike in auto-fuel duties which will add another 80 bps to its revenue kitty.

We could see some announcement from demand side also which could be +ve for consumption stocks like FMCG, Consumer Durables, Two wheelers, Construction, Road, Cement and NBFC. To name few stocks from this categories – Nestle, HUL, Dabur India, LIC Housing, L&T Finance, M&M Finance, ACC, UltraTech.