Fund Manager Talk | Valuation of capex stocks comfortable after correction: Deepak Ramaraju of Shriram AMC

“While the budgeted allocations appear subdued in terms of incremental growth, the existing order book for both rail and defence remain strong, and ordering activity is expected to pick up as the backlog from FY25 is filled,” he said.

Edited excerpts from a chat on how to invest after Budget 2025:

Do you think that the impact of the Rs 1 lakh crore boost to consumption from income tax relief in the Budget would be felt more on discretionary than staples?

The income tax relief, with exemption limit raised to ₹12 lakhs (₹1.275 million for salaried individuals) and restructured tax slabs, is expected to increase disposable income across the middle-income group, particularly in urban areas.This may benefit both discretionary and non-discretionary consumption, however, the impact seems to be stronger in discretionary segments due to the nature of consumer behaviour.

Higher disposable income may lead to higher discretionary spending. The tax cuts will result in savings of Rs 80,000–1,10,000 per individual, which may bring higher demand in apparel, footwear, QSR, jewellery, electronics, travel, entertainment, and home improvement.

Staples (FMCG, essentials) may see some uplift, but demand remains comparatively inelastic and unlikely to create a sharp surge.

Also read | Consumption boost in Budget too small to impact investment: Saurabh Mukherjea

Which other sectors stand to gain from the multiplier effect of increased disposable income beyond FMCG and consumer durables?

The income tax relief is expected to leave more disposable income in the hands of young Indians, driving higher spending across multiple sectors.

FMCG companies are likely to benefit from increased consumption which may also lead to higher advertising and promotion budgets, boosting revenue for broadcasters and digital platforms.

Cinema chains in the entertainment industry may experience higher footfalls and occupancy rates with a rise in movie-going. Quick-service restaurants (QSR) and the travel & tourism sector might also gain as this accelerates the already present shift in younger consumers’ preferences toward leisure and premium experiences.

Banking is also expected to see positive momentum, as increased disposable income will drive higher deposit growth and stronger credit demand, benefiting financial institutions. Additionally, the capital markets stand to benefit as higher savings could lead to increased investments into stocks, mutual funds.

On a broader scale, this boost in consumption and savings may contribute to a further increase in private capex, leading to higher employment generation and sustained economic expansion.

What do you think would be the impact on rail and defence stocks for the rest of 2025 given that the Budget had little to offer when it came to incremental growth in capex?

The overall capital expenditure target for FY26 is Rs 11.2 trillion, up 10% from FY25RE but flat compared to the initial FY25BE estimates.

For railways, the capex budget remains at Rs 2.5 trillion, unchanged from FY25RE and FY25BE, which is slightly below expectations of an upward revision. Similarly, defence capital outlay is set at Rs 1.8 trillion, reflecting a 13% increase over FY25RE and 5% over FY25BE, indicating a steady but moderate rise in spending.

While the budgeted allocations appear subdued in terms of incremental growth, the existing order book for both rail and defence remain strong, and ordering activity is expected to pick up as the backlog from FY25 is filled. Additionally, the government’s continued focus on domestic manufacturing and indigenization should sustain order flows for both PSUs and private players in the sectors.

Investors in capex stocks have been disappointed after the Budget. Given how the stocks have corrected in the last 3 quarters, do you think that valuations have become reasonable for one to start buying again?

While the Budget’s capital expenditure allocations for railways and infrastructure were slightly subdued with expectations, there are positive long-term drivers for the capex sector. The extension of the Jal Jeevan Mission and SWAMIH Fund 2 for affordable housing highlights continued government support for infrastructure. The Budget also emphasizes climate-friendly development, with a focus on boosting domestic value addition for solar PV cells, EV batteries, wind turbines, and other clean-tech components, alongside incentives for electricity distribution reforms and enhancing intra-state transmission capacity. The focus on nuclear energy, aiming for an additional 100GW by 2047, is key to the country’s transition efforts and will further support growth in the energy sector.

Given the recent corrections in capex stocks, valuations seem comfortable, which may offer selective investment opportunities in these sectors.

At current Nifty levels, how comfortable are you from a valuation perspective? Do you think the correction in small and midcaps can last for another couple of quarters given elevated valuations and slowdown in government’s capex growth?

At current Nifty levels, valuations seem relatively more attractive, especially in large-cap stocks, which are trading at less expensive multiples compared to mid and small caps. While mid and small-cap stocks may offer stronger earnings growth, their valuations still seem stretched, which adds a layer of risk despite their upside potential.

That being said, the simultaneous boost to consumption and capex, along with better-than-anticipated fiscal consolidation, provides a favourable backdrop for equities and support broader economic growth.

While we remain cautiously optimistic on large-cap stocks, given their relative stability and reasonable valuations, we are also selectively looking at mid and small-cap stocks. Overall, we will focus on companies with strong fundamentals that may offer good upside potential, but at reasonable valuations. This approach will allow us to balance risk and reward while capturing growth in pockets that offer the most promise in the current economic environment.

How are you tweaking your portfolios after the Budget?

After the Budget, we are taking a strategic & balanced approach in tweaking our portfolios. On one hand, the stimulus to consumption and the push for infrastructure growth provide a favourable backdrop for both large-cap stocks and select mid and small-cap stocks.

We are adjusting our portfolio with a mix of growth sectors and defensive bets, creating a diversified but risk-adjusted approach to navigate the evolving market conditions.