After rallying smartly since September 2020, Industrial stocks are still trading at their long-term average of ~22x two-year forward earnings. These valuations could expand materially as India sits at the cusp of a multi-year Capex cycle, said Bank of America in a recent report. The Capex cycle could further benefit from the infrastructure stimulus planned by the United States. “Our optimistic view is reflected in 10/16 stocks under our coverage having a Buy rating. We prefer EPC player: L&T, asset owners: Adani Ports, NTPC, product players: Cummins, Bharat Electronics, Crompton, Havells, Voltas, service provider: Concor, for exposure to this theme as we see opportunities for them to expand margins/RoE/valuations,” BofA said.
Government to lead Capex
The brokerage firm believes India could be staring at a Capex cycle similar to that seen between the financial years 2002-03 and 2011-12. “We expect $356 billion of orders to be awarded over 2 years, mainly led by government Capex (80% of orders). Government push to accelerate Capex is evident from the $25 billion surplus allocation for Capex schemes against expected curtailments along with the $27 billion allocation towards PLI schemes, and the timely payment to contractors.
Although some investors may argue that funding could pose a constraint for the government, BofA highlighted that the government’s resolve is apparent from continuing trend of cut in subsidies to push Capex, targeted high fiscal deficits until the financial year 2025-26, room to step up leverage for PSUs and government’s infra entities, and government recycling capital by selling operating infra assets.
Private sector to step in soon; US stimulus to help
BofA analysts further expect the private sector to jump on the bandwagon and accelerate capex cycle growth from 2024 onwards with PSUs. This is expected to be helped by the infrastructure stimulus in the United States. Talk of US infra stimulus worth $1 trillion seem to be progressing well. This could open up opportunities for capital goods players such as ABB India, Siemens Ltd. & Cummins India for product exports, especially given their relatively low utilizations at 50-85%, ambition to expand exports (15-25% of sales currently) and support from their US/Europe parents, they said.
Stocks to watch
–Larsen & Toubro – Price objective: Rs 1,954
–Adani Ports & SEZ – Price objective: Rs 874
–NTPC – Price objective: Rs 136
–Cumins – Price objective: Rs 900
–Bharat Electronics – Price objective: Rs 184
–Crompton Greaves Consumer Electricals – Price objective: 524
–Havells – Price objective: Rs 1,305
–Voltas – Price objective: Rs 1,114