Industrial stocks corrected after Finance Minister Nirmala Sitharaman in her Interim Budget set the capex allocation for FY25 at Rs 11.11 lakh crore, an 11.11 percent increase over the previous year's Rs 10 lakh crore.
Shares of L&T were down 1.42 percent at Rs 3,430.2 on the NSE. KEC International was trading at Rs 650.1 per share, down 1.15 percent. Additionally, KEI Industries sunk 1.8 percent to Rs 3,135.1 apiece.
India's largest engineering, procurement and construction company would have benefitted if the finance minister announces another big bang capex spend for FY25. The company has been increasingly winning overseas orders, particularly from Middle East, while domestic orders have seen a slowdown. In December quarter, L&T's domestic order flow was down 44 percent YoY.
The increase in the allocation is lower than the 25 CAGR rise seen over last five years. Industrial stocks, which have been beneficiaries of increased public capex spending, have rallied significantly over the year.
The BSE Industrials index gave a return of 65 percent over the last year. Shares of L&T, BHEL, HAL and ABB have risen between 32 percent and 166 percent during the period. This rally has been driven by increased allocation in infrastructure spending allocated by the government during the Budget of FY24.
According to a Nuvama report, the government allocated Rs 14.9 lakh crore in the FY24 Budget to the infrastructure space, which was 32 percent higher than the previous year’s allocations of Rs 11.3 lakh crore. The brokerage was expecting a 15-16 percent increase in the Interim Budget.
Jefferies had estimated that the allocation would grow only by 7-8 percent in the Interim Budget because of the need for fiscal consolidation. Its analysts said industrial stocks exposed to public capex would correct after announcements. But, they added, that a slowdown in government capex would not impact the overall capex cycle since the budget expenditure contributed only 15 percent to the overall gross fixed capital formation (GFCF).
Other analysts estimated that the first half of FY25 would be tepid for industrial companies due to an expected slowdown in project execution. Rajarshi Maitra, Senior Analyst at Incred Equities, said the project execution slowed down by 4-5 percent during the previous election years.
The order book-to-sales (OB-to-sales) ratio is also expected to go down from 3x in March 2023 to 2.4x in March 2024, Maitra added. This slowdown might result in lower revenue in the first quarter of FY25.
Companies with healthy order books are expected to pick up after elections.
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