Capex slowdown worrying, infra and capital goods valuations are very punchy: Nitin Bhasin, Ambit Capital

Nitin Bhasin of Ambit Capital shared his perspective on the capex landscape and how investors should navigate these stocks.

Since the pandemic, one of the biggest drivers of economic growth has been the government’s significant increase in public spending, particularly capital expenditure. However, in the current fiscal year, government capex has been somewhat underwhelming. Analysts attribute this slowdown to various factors—some point to a pause in government machinery due to elections, while others cite weaker tax collections.

Whatever the reason, government capex will be a closely watched number in the upcoming Budget, especially as growth appears to be tapering off from its peak. This comes at a time when the investment cycle uptrend has been a key theme keeping Indian stock market valuations elevated—particularly for investment-related sectors.

In this Moneycontrol exclusive, Nitin Bhasin of Ambit Capital shares his perspective on the capex landscape and how investors should navigate stocks linked to the investment theme.

What’s your take on the capex slowdown?

The Centre’s capex in 1HFY25 witnessed a sharp decline, falling 15% year-on-year (YoY). This is in stark contrast to the robust 35% compound annual growth rate (CAGR) seen between FY20 and FY24. The government managed to achieve just 37% of its annual capex target by the halfway mark, the lowest proportion since FY10. This is worrying since such a lower momentum has impacted job creation for unskilled labour, reduced liquidity in the system, and raises questions around the planning of projects if we are looking for continued increases in capex spends.

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But several economists say this is because of elections and will be fixed this year.

Partly, maybe. Budgeted numbers for FY25 themselves were low, but lower tax collections may have also contributed to the spending cut. Core capex was budgeted to grow by only 5.2% YoY in FY25. Key sectors like roads and railways saw growth plummet to just 3% and 5%, respectively, from a stellar 40% and 27% CAGR during FY20-FY24. Besides, net tax collections grew by a modest 9% YoY in 1HFY25, falling short of expectations. Non-tax revenues – both disinvestment and dividends – have been behind target, straining fiscal resources further. So, there are concerns building up around tax collections also.

So you don’t think the capex target can be made up by the end of this fiscal?

Meeting the full-year target of ₹11.1 trillion would require an aggressive 52% YoY increase in spending during 2HFY25. It appears unlikely. While back-ending of capex is very common, capex growth of more than 50% YoY was only achieved in FY21 when the base effect played a role. Secondly, capex in 2HFY25 would have to be approximately 70% higher than in 1HFY25; such 2H growth has not been seen in the last 10 years. We estimate a potential cut of ₹1.2 trillion, which would bring capex growth down to 4.5% YoY—significantly below previous trends.

But core sector capex has not done too badly, which is good from a stock market perspective, wouldn’t you think?

True. But the government reduced the share of core capex significantly from a peak of 81% in FY21 and 74% last fiscal to 66% for FY25. This is the lowest since FY16. On the contrary, the non-core components – telecom, loans to states in the form of interest-free loans, and an unspecified allocation of ₹662 billion to the Department of Economic Affairs – saw a big spurt in the Budget.

So, in terms of actual execution, core capex has fared better so far – the contraction compared to the budgeted figure was 8.5%, while the non-core segment contracted 38% in the first half. Despite the contraction, road and railway capex crossed 50% of the budgeted figure in 1HFY25. Apart from defense (31%), most sectors that are trailing their capex targets are non-core in nature.

That being the case, from a stock perspective, the infra pack still holds potential? How do you view valuations across the infra/capital goods space?

Infra and capital goods sector valuations are very punchy. Cement sector valuations have moderated and could be relatively a better bet compared to capital goods and infrastructure. In the power sector, especially anything around renewables, we find valuations to be very stretched. We like some opportunities in niche capital goods categories, either in the energy transition value chain or transmission INVITs, which could offer capital safety and dividend income in an otherwise expensive sector. We also like real estate companies in South India and NCR, as we do not see overheating of the nature observed in some other larger markets.

You say the bigger worry stemming from the contraction in public spending is consumption...

The slowdown in capex, especially infra-related, has directly hit rural job creation and aggravated the slowdown in consumption in the last few months. For a few years, we have seen that rural consumption isn’t growing at the expected pace. Perhaps, rising inflation has impacted real wage growth, and the lack of enough construction jobs has meant that the supply of agricultural labor has been higher, further impacting wage growth. In 1HFY25, moderation in capex by both states and the Center kept job creation weaker for unskilled workers and impacted consumption. We expect the situation to get slightly better in 2HFY25.

Your expectations from the Budget in terms of capex spending?

Firstly, we expect the government to set a fiscal deficit target of 4.5% of GDP, which is in tune with its medium-term target. Similar to the FY25 Budget, it would be reducing its borrowings as it plans to use the debt-to-GDP ratio as the new anchor instead of the fiscal deficit from hereon. As tax growth is expected to moderate and there is no progress on the disinvestment front, the government may announce a 10-12.5% growth in capex in FY26 (assuming FY25 closes with roughly 5% growth).

How do you expect capex allocations to change this year?

We hope they increase allocations to roads and railways, but at the same time also show a roadmap to increase private participation in both infra and manufacturing capex. The government has actively been trying to bring down its subsidy and welfare scheme allocations. We don’t expect any major hikes, but the MGNREGA allocation needs to be looked out for as a parliamentary committee has recommended wage hikes and an increase in guaranteed working days (from 100 to 150 days, a 50% increase). On the taxation front, we don’t think any major direct income tax announcements will be made, given that major changes were implemented in the FY25 Budget.

What portfolio positioning are you recommending to your investors?

We continue to maintain that investors should focus more on mega/large caps and have lesser allocations to small and mid-caps. And higher allocations to banking and IT sectors among the larger sectors.

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