Navigating turbulence!

The electoral results for the Lok Sabha elections came as a surprise to us as they were for most of the street. The BJP fell short of the 272 mark and will likely close at ~240 seats. NDA in all likelihood will form a fractured coalition with JDU and TDP, both of whom are relatively unreliable coalition partners. This could add to uncertainty that will restrict the country's incremental foreign capital flow.

The next key event the market will focus on is the budget. This is critical because we would now want to know whether the government would continue focusing on capital investments, manufacturing, and growing infrastructure in the country or would take this electoral result as feedback towards a more populist form of policy involving more handouts and subsidies.

India has had a good 10 years, with a strong infra build-out, indigenous manufacturing, and a focus on capital investments. This could take a turn for the worse in the third term given the dual challenges of a coalition government and a materially weaker mandate indicating rural pain.

Businesses focussed on the rural consumer have gone through a rough 12-18 months driven by dental rural demand. Although there was a recovery visible in Q424, the market hadn't fully appreciated this yet. However, the potentially increased focus of the government on rural distress can help businesses in the space positively.

Depending on the fiscal prudence, or a lack thereof in the budget, we could also see a weakening of the Indian currency. If this were to happen, focused export players operating out of India could stand to benefit.

In our view, a sectoral rotation is likely in the medium term, away from the infra & capital-heavy plays of the last cycle towards rural consumption and export-driven plays that could help drive the next cycle.

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