Our in-depth analysis of industrial coverage (19 stocks) across the past one and a half decades yields a couple of notable conclusions: a) Despite a weak demand scenario (FY13-18), the players that adhered to our ‘IBV framework’ — by taking strategic initiatives,balancing growth with cash flow and managing growth volatility —to expand target market outperformed by a long shot. b) Given the infra opportunity over five years is massive (about 4600 bn) and potential improvement in private capex provides a tailwind, capex this time around is likely to be better — more broad-based with improved cash flow but moderate growth.
Our top picks are Larsen & Toubro (L&T) and KEC International (KEC) as large and diversified players with strong balance sheets are favourably placed to ride the bigger/broader capex cycle.
We appraised companies on our IBV framework comprising: a) key management initiatives; b) balance between growth and cash flow; and c) volatility— adjusted growth.
The appraisal suggests companies adhering to the IBV framework were able to manage business better despite muted growth over the past six years and were better rewarded than peers.
In our view, it is worthwhile to appraise companies on the three parameters,which is a more incisive approach to stock selection as it captures strategic initiatives by management —a key factor that drives outperformance despite adverse cyclical factors.
In comparison with FY03–12 when strong public -private capex demand generated strong growth/returns in industrials, we believe capex going ahead will generate moderate growth/returns given capex is this time around is likely to be steady and much more diversified.
Segments such as renewable, defence, railways,smart cities ,etc are scaling up significantly.
Nonetheless , cash flows will get better with focus on better execution and improved utilization over the next two-three years.