What are the market’s key concerns:
Foreign institutional selling has been a significant drag on market sentiment and the rupee, forcing the RBI to tighten liquidity by selling US$ (to manage currency volatility), which, in turn, has weighed heavily on domestic investor risk appetite.
The slowdown in government capital expenditure and spending for a multi-month election cycle (to comply with Election Commission restrictions) has been reflected in slowing headline growth, job creation, and order book/earnings disappointments for the industrials and consumer-facing companies.
There is a risk of collateral damage to Indian exports as Trump injects significant uncertainty into global markets and corporate boardrooms with tariff cudgels to redress what he perceives as “unfair” trade balances and the systemic hollowing-out of US industrial capacity.
What are our key concerns?
US$ strength continues to weigh on risk allocations to non-US$ assets, potentially forcing the RBI to maintain a restrictive monetary policy stance.
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A mercurial, transactional Trump “reset” on geopolitics and global trade, risking debilitating tariff conflicts with significant attendant risks to global growth, inflationary expectations, energy markets, trade blocs, security alliances, out-sourcing in general, and multi-lateral agency funding.
India’s nascent private sector capex cycle is yet to translate into meaningful new employment. The government has certainly done its bit with targeted infrastructure and industrial spending and with being disciplined with its finances, not crowding out the private sector. The private sector needs to step up more aggressively.
Persistent food inflation and stagnant incomes impair domestic consumption, particularly at the bottom of the pyramid.
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Tepid deposit mobilisation in the banking system limits the banking sector’s ability to offer leverage on attractive terms to industrial and retail customers.
Amidst the gloom, India’s budget was thoughtful, engaged and a positive shot-in-the-arm.
Mindful of the risks (from protracted trade conflicts) to global growth and, specifically, for Indian exports, Finance Minister Sitharaman laid out a budget that surprised positively, focusing on development, job creation, and sustainability and on stimulating domestic demand and consumption, while remaining committed to industrialisation and a credible, glide-path towards further fiscal consolidation.
The tax cuts for the middle class took the headlines, and justifiably so, with the fundamental income tax exemption limits being increased from INR700,000 ($10,848) to INR1.2 million ($18,596). The tax breaks are a clear uplift for 80% of the country’s salaried tax-payers, with highly positive implications for disposable income and discretionary consumption, and potentially, an offset to any slowdown in Indian exports.
Reasonable budgetary maths allowed the Reserve Bank of India to cut policy rates for the first time in five years by 25bps to 6.25%, responding appropriately to moderating growth/inflation dynamics. Budgetary assumptions are anchored around 10% nominal GDP growth, continued resilience in GST collections, stable government capex at 3% of GDP, and a moderating (and credible) fiscal deficit target of 4.4% of GDP for the fiscal year ending March 2026 (versus an estimated 4.8% in March).
A 17% y-o-y increase in federal government capital expenditure focusing on infrastructure (railways, roads), shipping and critical minerals, bolstered by long-term interest-free loans of US$18 billion ($24.4 billion) to boost state-level capex.
Tax incentives to promote domestic manufacturing and import substitution, with specific measures for new manufacturing units and developing “plug-and-play” industrial parks in 100 cities.
Development of climate finance taxonomy and specific policies to accelerate the energy transition, balancing growth with environmental sustainability.
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The high-frequency data we track continues to reflect an improving macro backdrop. As central and state governments ramp up capex before the close of the March fiscal year, the strong, cyclical growth recovery story is expected to be sustained.
GST collections in January rose to their second-highest level ever, at INR1.96 trillion, +12.3% y-o-y, versus + 7.3% last December.
Federal government capex clocked in at +95% y-o-y in December to INR1.7 trillion (versus a monthly average of INR640 billion registered during April-November 2024, reflecting the slowdown during the elongated election season). We expect government spending to accelerate following the BJP’s dominant performance in the recently concluded Delhi State elections.
Manufacturing sector Purchasing Managers’ Index (PMI) registered a six-month high of 57.7 in January, while services PMI remained robust at 56.5.
We are particularly encouraged by improving systemic credit growth (+11% y-oy), recovering two-wheeler and passenger vehicle registrations, and robust air passenger and passenger rail traffic data (turbo-charged by the 400 million pilgrims during the 45 days of Maha Kumbh Mela, an event held once every 12 years).
We remain mindful of exogenous risks from prolonged trade friction and geopolitical tensions, sustained US$ strength and higher-for-longer yield curve dynamics, and elevating global equity risk premiums.
We do expect that market sentiment and the focus on the strength of the underlying fundamentals will be restored on the back of an eminently sensible budget (encouraging domestic consumption and ongoing reforms without sacrificing fiscal discipline), the RBI’s recent decision to cut interest rates and inject liquidity into the banking system, and expectations that the BJP’s resounding victory in the recent Delhi state elections will encourage an acceleration in infrastructure and industrial capex.
Market volatility over the last few months has created meaningful risk/reward opportunities relative to the sustained strength in earnings and free cash flow growth.
We expect our portfolio holdings to deliver on earnings compounding at about 20% annually over the next three years.
We are invested in the beneficiaries of industrial and defence capex, power sector reforms, global market share gains for the Indian pharmaceutical companies, sector consolidation, urbanisation and recovering discretionary consumption.
We are sharpening our pencils for the beneficiaries of easing systemic liquidity and regulatory constraints and cyclically depressed globally competitive industrials.
Stock highlight of the month
The company we would like to highlight this month is Mahindra and Mahindra (M&M), India’s market leader in utility vehicles and tractors. The company is poised to grow market share in its key automotive and farm equipment segments on the back of 25 new product launches across its ICE (internal combustion engine), EV (electric vehicle) and light commercial vehicle (LCV) platforms over the next five years, making it a key beneficiary of India’s focus on infrastructure development, farm mechanisation, rising disposable incomes, and electrification.
We expect M&M to compound revenues at 15%+ over the next three years, well ahead of consensus estimates, compounding in the 10%+ range.
• On the back of a good monsoon, a winter crop sowing season, and the government’s focus on boosting farm productivity, output, and rural incomes, we anticipate sustained demand for M&M’s core tractor and agricultural equipment portfolio.
• We expect the introduction of strict new emission standards for agricultural, farm, and construction equipment from April 2026 to drive a strong replacement cycle, providing a structural uplift for M&M’s volumes and mix.
We are excited by the technology/price competitiveness of M&M’s EV platform and anticipate the launch of five new electric SUVs over the next 18 months to underpin volume/mix upside relative to current market expectations.
We expect M&M to compound earnings at 18%+ annually over the next three years, while the Street is projecting a more modest 12% CAGR.
• We expect volumes and mix to surprise positively for the domestic farm equipment, light commercial vehicle, and SUV/auto segments, driving strong operating leverage.
• Given the new capacity additions and realised supply-chain efficiencies, we anticipate high-margin export volumes for the XUV 3XO and Thar ROXX to surprise positively.
• We expect a structural uplift in dividend payout as management remains committed to improving its capital allocation discipline and given the dynamics of return on capital and return on capital employed, and its strengthening balance sheet and free cash flows.
The Tantallon Asia Impact Fund SF is a fundamental, long-only, Asia-focused, total return opportunity fund. The fund invests with a horizon of three to five years in a concentrated portfolio (30–35 positions without leverage), market cap/sector/capital structure agnostic but with strong conviction on the structural opportunity, scalable business models, and data-driven analysis of sustainability, innovation, societal trends, and material environmental and governance initiatives to drive profitability. Tantallon Capital Advisors is a Singapore-based entity set up in 2003. It holds a capital markets service licence in fund management from the Monetary Authority of Singapore
