Global brokerage firm Jefferies, in a recent note, highlighted a strong correlation between the historical capex spend and the sales of key companies in the Indian market. According to its analysis, the government's capex spending has grown at a healthy CAGR of more than 18% over FY14–FY24.
The brokerage firm also pointed out that the Capex-to-GDP ratio for the government in FY24 is likely to be at 3.3%, which represents a significant improvement compared to the 1.7% recorded in FY14.
Jefferies sees two growth drivers for India's capex cycle: private and government/public capex. On the private side, it says the average industry capacity utilization has now reached 73%, which could entail fresh capacity additions across many sectors.
On the government side, the 2023 annual Budget has a positive impact on capex, particularly infrastructure. Additionally, capex under the Production-Linked Incentive (PLI) scheme and emerging opportunities such as solar and data centers may drive the next wave of growth, according to the brokerage.
Jefferies has identified Polycab India, Supreme Industries, Pidilite Industries, Finolex Cables, and Havells India as key capex plays. The brokerage expects these firms to post an average sales and PAT CAGR of 14% and 25% for FY23–26E, with operating profit margin (OPM) expanding by 265 basis points (bps) on operating leverage.
Polycab India: With 65% of its sales being B2B, and cables and wires forming approximately 80% of its product mix, Polycab is the market leader with a 22–24% organized market share, and the brokerage expects that it will outpace industry growth (11–12% CAGR) due to its diverse SKU breadth, expanding distribution, and share gains.
The top 10 customers of Polycab account for only 22% of its sales, indicating that the business is fairly de-risked. Over the period of FY23-26e, Jefferies expects Polycab to post sales and PAT CAGR of 16% and 24%, on higher volumes led by capex, housing, and infrastructure, compared to a sales CAGR of 12% for FY17–21.
Supreme Industries: The company is the market leader in PVC pipes, with a diverse product mix that includes pipes, packaging, industrial B2B, and furniture. The majority of the company's pipes sales come from the construction industry, while the remaining sales come from agri demand. The company has a pan-India footprint with 26 plants, which is larger than its peers.
The company also has a higher pipes SKU count of approximately 6,000, which is twice that of its competitors. Jefferies considers this company to be a holistic play on capex, housing, and infrastructure, and it expects the company to achieve a sales/PAT CAGR of 14%/26% for FY23-26e.
Pidilite Industries: It is a leader in domestic adhesives and sealants, with a market share of approximately 65%. The company offers a broad range of over 850 products and more than 6,000 SKUs, which is significantly more than its peers. The company's sales are primarily to retailers, who are influenced by carpenters, plumbers, masons, and other professionals, said the brokerage.
PIDI's industrial segment is sold directly to distributors. With its market dominance, extensive range of products, broad distribution network, and strong brand recognition, PIDI is well-positioned to benefit from capex, construction, and infrastructure investments.
Jefferies projects that PIDI's sales and EPS for FY23–26 will grow at a compound annual growth rate of 14% and 28%.
Finolex Cables: The company in the electrical cable industry generates 82% of its sales from electrical cables. Its key end-users are construction wires, which make up 60–65% of its sales mix, followed by auto, agri, and industrial (flexible) at 25%.
Power cables, mainly sold to other businesses, make up about 10% of its sales. With the likely revival in capex and housing, the brokerage expects this segment to benefit and forecasts a 16% sales CAGR over FY22–25.
In addition, FNXC's communication cables segment, which accounts for around 12% of its sales, is also likely to benefit from capex/5G rollout by telcos, it added.
Havells India: It is a key player in the consumer discretionary market, offering a wide range of products. HAVL's product portfolio includes switchgear, cables and wires, and lighting, with a mix of B2B (25% of sales) and B2C (75% of sales).
Jefferies expects HAVL's sales and PAT CAGR to grow at a rate of 12% and 23%, respectively, from FY23-26e. Additionally, Jefferies predicts that Lloyd's margins will also improve during this period.
The brokerage's top picks in the mid-small-cap space are Polycab and Supreme Industries. Jefferies sees Finolex as a value pick given its undemanding valuation (FY24e PE at 21x).
However, the brokerage rates Pidilite as a "hold" due to its rich valuations and would consider being more positive if there is a correction in its share price. Havells is also rated as a "hold" by the brokerage due to its continued margin weakness, especially in Lloyd, and rich valuation.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.
