Capital goods sector optimistic on increase in infrastructure spends, continued capex

Industry analysts are expecting the government to continue with its capex plan for FY25 with a heightened focus on Production-Linked Incentive (PLI) scheme amongst others etc.

All eyes will be on Government announcements on increased capital expenditure and infrastructure development in the July 23 Union Budget.

This will be important for the capital goods sector, which has seen a slow start to the new fiscal on account of elections.

Budget expectations

Industry analysts are expecting the government to continue with its capex plan for FY25 with a heightened focus on Production-Linked Incentive (PLI) scheme amongst others etc.

Manoj Rawat, Research Analyst at Anand Rathi Institutional Equities, says that they expect the government to continue with its capex plan of Rs 11.1 trillion for FY25.

“Although the ordering has been weak so far due to elections, the execution is expected to be strong given the robust outstanding order book. For instance, ABB, Siemens, and L&T currently have order books of Rs 8,400 crores, Rs 47,000 crores, and Rs 475,800 crores respectively, giving them revenue visibility of 1 to 2 years,” says Rawat.

Rawat also expects the government to focus on areas like the PLI scheme, renewable energy, power, and water infrastructure, which could benefit companies like ABB, Siemens, Cummins, BHEL, and Hitachi Energy.

Similarly, Amit Anwani of Prabhudas Lilladher, believes that the government will not announce major changes in capex spending from what was announced in the interim budget.

“However, there might be slight adjustments, particularly in the railway sector, with a focus on safety and modernisation,” he says.

Market participants also expect the budget to indirectly benefit various sub-segments within the capital goods universe through allocations to infrastructure areas such as roads, railways, and defence while expecting announcements related to railway safety, new railway lines, and further investments in semiconductor manufacturing.

Parikshit Khandpal, VP of Institutional Securities, HDFC Securities, notes that capital goods have a diverse number of segments, including consumables driven by infrastructure spending, power value chain components, process industries like oil & gas, and railway supplies.

Similarly, Arafat Saiyed, Vice President of InCred Capital, highlights a structural shift in capex and includes stocks like L&T, KEC, Kalpataru Projects, and Skipper as his top picks on the back of expectations of investment picking up in power transmission and distribution.

“The earlier trend was towards traditional sectors like textiles, power, metals, and cement. This is now shifting towards renewable energy, power transmission and distribution, data centers, new edge technology, and semiconductor manufacturing. The ongoing export recovery and government thrust via the PLI scheme are critical enablers,” says Saiyed.

High Valuations remain a concern

The segment, most analysts agree, has high valuations with major companies trading at more than 80 times their one-year forward earnings.

"Valuations in the capital goods segment are currently at an average of 50-60 percent premium compared to long-term averages. This is due to strong export and domestic markets in power, renewables, and transmission," Khandpal noted.

Anwani adds that while valuations have been quite high, particularly compared to averages of the past five to ten years, with increases of 50 to 80 percent in some cases, the macro themes within railways, industrial equipment, and power equipment remain strong.

“For example, in power equipment, there is significant transmission capex of 1.5 lakh crore expected in the next 18 months for transmission evacuations of solar power from Khavda and other renewable parks. This includes high demand for complex products like HVDC, which are essential for carrying high power over long distances. Many companies are increasing their capacity by 25-30 percent, anticipating 12-13 percent volume growth over the next 2-3 years,” explains Anwani.

Further, for the railway sector, Anwani notes that there have been increased valuations but also significant demand.

Major orders have already been placed in the recent past, such as a Rs 26,000-crore locomotive order to Siemens. He expects continued growth in rolling stock orders, including electric locomotives and metro coaches with companies like Titagarh Wagons, Jupiter, BEML, Siemens, and others benefiting.

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