While the budget will provide clarity on short-term spending priorities, experts believe that the focus on investment sectors will continue beyond the budget.
Experts note that sectors such as defense, railways, power, and infrastructure are likely to remain in focus as long-term growth drivers. Despite the ongoing economic slowdown and global uncertainties, these sectors offer opportunities for long-term investments, and their recovery and growth will continue in the coming quarter. The post-budget period is expected to witness continued focus on these structural growth areas, even as challenges like capex shortfalls, market volatility, and geopolitical risks will continue.
Capital-led growth remains a priority
Alok Agarwal, Head - Quant & Fund Manager, Alchemy Capital Management, noted that the recent growth cycle has been primarily capital-driven, with substantial emphasis on capital expenditure rather than consumption. “Growth in this cycle has been led more by the capital side rather than the consumption side,” Agarwal said. However, he added that there remain concerns over the underperformance of capex spending so far in FY25. “The annual capex target was Rs 11.1 lakh crore, but only Rs 5.1 lakh crore has been spent in the first eight months. The remaining months will need significant acceleration to meet targets,” he noted.
Agarwal added that the fiscal prudence displayed in previous years, with a focus on capex over revenue expenditure, has been challenged by the current lag in capital spending. “This year, revenue expenditure is in line with the budget, but capex lags significantly. We expect more clarity on this imbalance post-budget,” he added.
Key Sectors: Railways, Defence, and Roads
Infrastructure continues to be a top focus for the government, and key sectors like railways, roads, and defence are expected to benefit from continued investment. Fisdom's Nirav Karkera noted that railways, in particular, hold significant long-term potential. “Railways are critical from a freight and connectivity standpoint, and the railway budget this year is expected to be optimistic given the infrastructure implications of a developed network,” he explained.
Road transport, while critical, has faced challenges with spending, according to Parikshit Kandpal, VP of Institutional Research at HDFC Securities. He noted that the road sector allocation in the previous year showed only a 3% growth, and despite an expected increase this year, the capex shortfall could make growth numbers appear optically higher in the future. “The road sector allocation in the February 1 budget will likely see a 5% increase, but overall capex may end 15% lower than expected. However, the next year (FY2026) could show growth of 15-20%,” Khandpal said, adding that states like Maharashtra are gearing up for larger infrastructure projects, while others, such as Uttar Pradesh, are likely to ramp up their spending. “Both central and state governments are likely to execute more projects in FY26, benefiting infrastructure companies," he notes.
Defence also will remain in focus, with both geopolitical uncertainties and domestic security concerns driving continued government push. Karkera added, “The government’s commitment to strengthening India’s defence infrastructure is likely to remain, especially in the face of changing global dynamics.”
Sunny Agrawal, Head of Fundamental Research at SBI Securities, suggests that shipping, both in the defence context and general infrastructure, is also a priority. Pure-play infra companies, such as EPC firms in power, road construction, and real estate construction, are now more attractive in terms of valuations. He adds, "Post-correction, most valuations in the infrastructure sector—whether railways, defence, or pure-play infra companies—have become more comfortable. These companies may attract institutional interest both before and after the budget." For example, Siemens' 1-Year forward P/E is currently 75.41, against 99.81 as of September 30, 2024. Similarly, Transformer Rectifier India Limited has a 1-Year forward P/E of 69.66, against 60.79 as of September 30, 2024. Experts clarify that while the stocks are not cheap, most of them are comfortable, even if they continue to remain high, additionally that there are some exceptions where valuations continue to remain high such as Siemens.
In the power sector, both renewable and non-renewable energy are expected to see long-term growth as demand continues to rise. “In the past decade, transmission was prioritised. Now, with manufacturing expanding and power demand growing, we see long-term potential in both renewable and non-renewable energy sectors,” Agarwal suggests.
The green energy sector, including battery storage, EV infrastructure, and solar power, continues to gain traction due to policy support and incentives. Transmission also remains strong, with significant HVDC (High Voltage Direct Current) order announcements expected in the coming year. Khandpal noted that companies like GE T&D, Siemens, Hitachi, L&T, KEC, and Kalpataru are well-positioned to benefit from these trends.
Agrawal adds that the power sector has a long growth runway with opportunities in wind, solar, hydrogen, electric vehicles, and ethanol. Sub-sectors such as transformers, power, and cables will also remain in focus. Companies like Transformer Rectifier India Limited (TRIL), CG Power, Danish Power, and Polycab are some of the stocks within the sector that Agrawal believes will be good investing opportunities.
Amongst power and green energy stocks, experts note that recent corrections have made valuations more reasonable, even if they are not cheap.
Valuations more "reasonable" post corrections
Experts agree that the government’s continued focus on infrastructure will be a key driver for growth in the coming years. Khandpal pointed out that infrastructure sector valuations are currently attractive, with a forward price-to-earnings (P/E) ratio of around 11x for FY26 and FY27 earnings.
“The correction in industrial and CAPEX sector valuations has made them more attractive,” he stated, highlighting that the government’s focus on infrastructure is a positive indicator for long-term growth.
According to Agarwal, sectors like Electronic Manufacturing Services (EMS), which have seen valuations climb, may face increased volatility. “Valuations in EMS are elevated, and there’s little margin for error. If companies fall short of market expectations, the impact on stock prices could be swift,” he warned. Despite this, EMS remains a structurally strong growth sector in the long term. For example, key EMS players like Dixon Tech and Keynes Tech are trading at 124.46x and 91x.
Karkera concurred noting that while valuations in the power sector may seem elevated, the growth potential continues to make it an attractive investment option. “The growth prospects in the power sector make it comfortable valuation-wise, even though it may seem slightly expensive compared to other sectors,” he added.
On capital goods as a sector, Agrawal adds that there has been significant re-rating over the past two years, with all positives already priced in. "Many companies, like those in the bearing segment or small engineering firms, are trading at 50–60 times PE multiples. Even with 20–25% growth, valuations pose a concern. Consequently, stock prices may remain range-bound or trade sideways despite good financial performance," he explains.
Risks ahead
While the outlook for many sectors remains positive, experts caution about potential risks from geopolitical uncertainties, trade barriers, and the global business environment. Risks include geopolitical uncertainties, trade barriers, and private-sector capex hesitancy due to global business environment concerns. Commodity prices and China’s actions could also impact demand indirectly.
Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
