As road & rail projects gather steam, cap good companies set for a decadal growth opportunity

• Defence, road and rail spending by the government is aiding growth in capital goods companies.
• Due to the long-term nature of government spending, tendering momentum will go on till FY30, says Motilal Oswal Securities.
• Wait for a good entry point in capital goods stocks, say analysts, as they have seen a good run in recent times.
• Digital and green infrastructure-based ordering led by the private sector can also aid growth in a few players.
  

India is building more roads, expanding railways and defence orders are trickling in. That’s good news for capital goods companies which also got another near-term boost in the form of lowered political risk; after the national ruling party BJP secured mandates in three states.

According to Motilal Oswal Securities, with government spending on metros, water projects, transmission and more, the stage has been set for a ‘decadal growth opportunity’. Driven by long-term structural tailwinds, the sector is all set for a healthy revenue compounded annual growth rate (CAGR), it adds.

The government has already spent 47% of what it budgeted for FY24, in the first half of the fiscal year. Private sector, which is spending less, is moving towards automation and green infrastructure, providing smaller but steady orders.

In the second quarter, the manufacturing sector grew 13.9%, hitting a nine-quarter high – all indicating that good times are ahead of capital goods companies.

The ‘expanding pie’

Government’s capex is projected to grow to ₹17 lakh crore in FY24 as compared to ₹13.5 lakh crore in FY23. With healthy tax collections, there are few doubts on the government’s ability to keep up the pace.

“Government has outlined various capex plans for transmission, railways, highways, water, and defense indigenization as well as several PLI schemes. Though we believe that these targets are aggressive as compared to past runrates, even a 60-70% achievement ratio of the said targets can result in significant long-term opportunity for the sector,” says Motilal Oswal Securities.

Most of the government’s spending plans are for the long-term too. And this will keep the tendering process busy till FY30, analysts expect. Companies too are all set to gain from the growth, by expanding capacities.

“Demand-supply gaps, improved pricing and confidence over sustenance of capex momentum — all have triggered expansion in manufacturing capacities across companies; especially eyeing the latest revival seen in the power sector,” said a report by IIFL Securities.

Wait for entry points say analysts

Driven by robust order inflows, expanding margins due to lowered raw material cost, most companies in the sector gained significantly in the last few months, barring a few exceptions. That has altered the risk to reward profile of the sector. L&T and Bharat Electronics are IIFL’s preferred bets on the relative risk-reward trade-offs.

Motilal Oswal also has a Buy recommendation on L&T, ABB, Siemens, Cummins, and a ‘neutral’ stance on Bharat Electronics, Thermax and KEC. “We are positive on the business models of these companies but would look for better entry points owing to unfavorable risk reward at current valuations,” it adds.

Cap goods stock movements
Source: BSE

The digital infra opportunity

The size and scale of opportunities that will land in the kitty of companies are also different for companies in the sector. Infrastructure spending bodes well for companies like L&T, Bharat Electronics, Siemens, Power Grid, Hitachi and more.

Smaller and recently listed companies like Ideaforge, MTAR Technologies, Netweb Technologies and more can gain from PLI-led schemes.

“We expect the uptick in capex to be driven by PLI-led schemes, data center and EV/EV charging-led infrastructure; increasing expenditure towards industrial automation and digitization, and sustainability-driven capex,” said Motilal Oswal.

As more companies go towards digitization and the cloud, companies that provide HVAC and cooling systems are also expected to bring in orders for companies like Siemens, ABB to gain from the same.

Such orders are also expected to come from the private sector whose capex spending has been sluggish and patchy this year. While there has been an uptick in sectors like cement, pharmaceuticals, chemicals, telecom, food & beverages, and metals & mining, most of the spending is veering towards sustainability.

“We see select pockets where opex-led spend towards greener sources of energy and sustainability is happening. We expect the private capex cycle to take some more time to revive,” says Motilal Oswal.

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