Capital expenditure (Capex) as a theme has been in focus lately with the Government of India focussing more on infrastructure and real estate. According to a recent report by Jefferies, India is on a path of capex cycle recovery, notwithstanding the global concerns.
It pointed out that investors have warmed up to a capex upcycle, but there is a perceived dearth of playable stock ideas. As the investment cycle gathers pace, the brokerage believes that investors will be forced to buy the stocks even if considered expensive.
"We liken this situation to the re-rating of consumer stocks over the last decade. Our preferred capex cycle plays are L&T, Thermax, Polycab, and KEI," it suggested.
Capex cycle likely to accelerate. Here's why
According to Jefferies, a global slowdown won't impact India’s capex cycle.
"Like the global trend, the Indian rate cycle looks close to peaking. We do not expect the developed world phenomenon of higher rates to impact growth through a slowdown in housing & corp spending. The Indian housing cycle has multiyear pent-up demand and is more dependent on pricing sentiment (now strengthening). We expect the property cycle to strengthen further over the next 3-4 years. Corporate sector leverage is at a cyclical low, and Corp spending will likely rise in 2023. Indian Banks are very well capitalized, and their Tier-1 capital to risk-weighted assets is at an all-time high," said the brokerage, listing the key positives benefitting the capex cycle.
It also pointed out that helped by a property upcycle, and various government initiatives to drive capex, the risk appetite in Indian corporate and banks has gone up.
"Order flows in industrial companies have also increased, with year-on-year growth of over 15 percent from the pre-pandemic lows of 5 percent. With capacity utilization at 73 percent, above the historical average, we are optimistic that we are entering a new phase of the capex cycle," Jefferies stated.
The note observed that the rising consumption share over the last decade has driven price-to-earnings (PE) multiples, and a similar trend is evident in the capex cycle.
It informed that over the last decade, consumption share in GDP, was rising, when we saw consistent re-rating in consumer stocks. The 1-yr forward PE of FMCG stocks, which was 20x in 2011, is now 50x whereas consumer discretionary names (ex-autos) went up from 20x to 70x over the same period. The re-rating was also a function of investors preferring to play the consumption theme rather than the weakening investment theme, highlighted the brokerage.
"By applying a similar trend seen in the consumption cycle to the capex cycle, we believe that the revival of capex will result in the re-rating of industrial stocks, particularly as options are limited," the report stated.
As per the brokerage, there is a dearth of large liquid stock ideas to play the story, especially as a few large names, viz. L&T, Adani, cement sector, suffer from ESG issues as well. It continues to remain overweight in the industrial sector with preferred picks being L&T, Thermax, Polycab, ABB India, Siemens and KEI. Some of these stocks are already re-rated but with the expected earnings growth of 25-30 percent CAGR over FY23-25, the stocks could outperform even if PEs sustain, it forecasted.