The valuations of industrial and power stocks still show scope of further upside, despite rallying over the past three years, said international brokerage Jefferies.
The last capex upcycle peak occurred during 2006-2008. During this time, L&T traded on average at a 90 percent premium to Nifty during April 2006 to 2008 and is currently trading at 70 percent premium. In this context, L&T could rerate 11 percent further from current levels, said Jefferies.
Siemens India is trading largely similarly at 185 percent premium to the benchmark index compared to the 187 percent premium then.
According to Jefferies, this could lead to the current valuations sustaining, especially since power transmission and distribution and the railway sectors are seeing traction.
For ABB India, the counter is trading at a sharp premium of 216 percent compared to 123 percent during the 2006-08 cycle. However, the business has changed, following the sale of its power grid division.
From 2006 to 2008, NTPC and Power Grid shares rose 84 percent and 63 percent, respectively, compared to Nifty’s 40 percent growth. According to Jefferies, NTPC could potentially re-rate 17 percent and Power Grid 32 percent from current levels.
Jefferies remains constructive on the industrials sector, with industrial and infrastructure capex to see a CAGR of 16 percent from FY23 to FY26, per Jefferies, compared to 6 percent from FY11 to FY20.
The growth in infrastructure and industrial capital expenditure is being driven by key sectors such as Power Transmission, Railways, Data Centers, and the Production Linked Incentive (PLI) initiatives.
On December 17, Jefferies said its top picks in the industrial sector, include Larsen & Toubro and Siemens. These selections are based on strong order flows observed in the second quarter.
Jefferies highlighted that L&T holds a favourable position in both the Middle East and domestic markets. Siemens may benefit from the recovery in its Power Transmission and Distribution (T&D) division, according to Jefferies.
Over the past six months, L&T shares have seen a gain of around 25 percent, while Siemens India has risen around 24 percent. Despite Jefferies' negative outlook, ABB India has outperformed, rising about 32 percent during the same time period.
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