The Union Budget fell short of investor expectations on the capital expenditure front, as the government prioritised boosting consumption and maintaining fiscal prudence. This shift in focus raised concerns over muted infrastructure spending, dampening sentiment for capex-linked PSU stocks.
The revised capex estimate for FY25 was lowered to Rs 10.18 lakh crore from the originally allocated Rs 11 lakh crore. For FY26, the outlay saw a modest increase to Rs 11.2 lakh crore, still below industry expectations of Rs 11.5 lakh crore.
Markets were disappointed by the subdued capex growth, especially amid a slowing GDP. Investors had anticipated a stronger push for sectors like roads, railways, renewables, power transmission, defence, and new-age infrastructure.
"The minimal increase in capex is underwhelming. The government's earlier focus on infrastructure is now being overshadowed by political compulsions and freebie politics," said Apurva Sheth, Head of Market Perspective & Research, Samco Securities.
Despite the broader disappointment, certain sectors received favourable allocations. The defence budget saw a 9.5 percent increase to Rs 6.8 lakh crore, but railway spending remained unchanged at Rs 2.52 lakh crore for the second consecutive year. The power sector received incentives for distribution reforms and intra-state transmission upgrades.
The government’s conservative capex stance signalled a shift towards greater private sector participation. "It’s no surprise that capital goods, engineering (including defence and railways), and infrastructure stocks have reacted negatively post-Budget," noted Gaurav Dua, Head - Capital Markets Strategy, Mirae Asset Sharekhan.
Pankaj Tibrewal, founder and CIO of IKIGAI Asset Manager, believes that with subdued capex spending, PSU growth may remain sluggish until private sector investments gain momentum.
This outlook weighed heavily on PSU stocks, particularly in railway, defence, and construction sectors, which were already grappling with stretched valuations over the past six months and faced renewed selling pressure.
While the initial market reaction to the Budget was broadly negative for PSUs, experts remain divided on its medium-term implications. Railways as a sector is expected to bear the biggest brunt of muted capex spending, followed by road and infra stocks that also received stagnant spending targets. However, sentiment towards defence stocks are likely to fare better.
Aishvarya Dadheech, CIO of Fident Asset Management, noted that the impact won't be uniform across sectors. "While railways, roads, and infra stocks may lose favour, defence stocks will remain strong," he said.
He further pointed out that the defence capex allocation isn't pessimistic but rather realistic. Prashant Khemka, founder of White Oak Capital, echoed this view, stating that Indian defence firms remain in their nascent stages and offer competitively priced products compared to global counterparts. As a result, Khemka believes the government can meet its defence procurement targets even without a significant capex boost.
With defence indigenisation gaining traction, Khemka suggested that the government could even reduce budgetary allocations without compromising procurement volumes. "The key is to assess where capex has been curtailed and where it remains intact," he added.
Dadheech also highlighted the strong strategic relationship between the government and the defence sector, reinforcing its resilience. On a broader scale, looking at the capex targets, UBS Securities expects PSU growth in FY26 to be driven by defence, followed by housing, power, and petroleum.
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