Brokerage house Prabhudas Lilladher believes India is on the verge of a big capex cycle recovery, which will play out in the next few years.
Despite big spending from the government on infrastructure development, there has not been a typical industrials-led capex cycle in the last several years, the 2003-08 cycle was led by power and infrastructure, Head of Research Amnish Aggarwal says in an interview to Moneycontrol.
Seasoned in the financial markets for almost 20 years, the director of research at the Institutional Equities Desk believes industrial capex revival and emerging changes due to digitisation and renewables will be a theme to play for in the next 3-5 years.
The recession in developed markets, if any, can actually be beneficial for Indian capex recovery as global players might resort to higher low-cost sourcing from India, he says. Excerpts from the interview:
Do you expect a significant boom in India’s capex cycle in the coming years?
Yes, we believe India is on the verge of a big capex cycle recovery, which will play out in the coming few years. Despite big spending from the government on infrastructure development, we have not seen a typical industrials-led capex cycle from last one decade and 2003-08 cycle was also led by power and infra.
The government has been undertaking huge capex plans as the FY23 Budget has increased capex plans of the government by 10.6 percent to Rs 12.2 trillion. National Infrastructure Pipeline (NIP) and resolve to provide amenities like roads, drinking water and housing will keep government capex high.
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Production linked incentive (PLI) worth Rs 2,000 billion across 14 sectors and benefits from China +1 in specialty chemicals, textiles etc. will revive capex steel, cement, textiles, oil and gas, electric vehicle, solar, chemicals, food processing and renewables will push capex higher.
Global Infra and capex driven by large economies will boost demand for engineering goods and services thus increasing capacity utilisation.
Infra status to data centres, PLI for renewables and higher domestic sourcing for defence are positive.
If you see a boom in India’s capex cycle, then are we in the midst of a strong earnings cycle? Also, what are other implications of capex cycle?
Revival of capex cycle will have multiplier impact on the economy. Increase in domestic industrial base will boost the employment and hence purchasing power in the economy. It will revive demand, boost bank credit and also reduce imports and volatility due to global variations.
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What are the themes to bet on if we are moving towards strong capex cycle?
We believe renewable energy, smart grids, smart cities, decarbonisation in fuel, digitisation, electric vehicle, semiconductors, urban infra, PLI, data centres, defense and specialty chemicals are the key themes to bet on. We believe industrial capex revival and emerging changes due to digitisation and renewables will be a theme to play for coming 3-5 years.
Do you think the recession if it comes in developed markets can delay the capex recovery in India?
Recession in developed markets can actually be beneficial for India’s capex recovery as global players might resort to higher low-cost sourcing from India.
The country will continue to do well as we are largely a domestic demand-driven economy, although a little delay can’t be ruled out. If the global slowdown results in decline in prices of crude and commodities like steel and chemicals, India will be among the largest beneficiaries.
Are you super bullish on the banking space, with strong balance sheets?
Banks are among biggest underperformers since the first Covid wave. Healthy balance sheets, revival in credit growth and current interest rate scenario augurs well for strong banks.
We believe strong credit growth and rising interest rates environment will boost their net interest margin’s given faster asset repricing. Domestic demand, capex recovery and infra development will boost credit demand and hence profitability and return ratios.
Are we in the middle of auto sector rally? What are the segments to pick?
Auto sector has been doing well on (1) strong pent-up demand from the last three years of slowdown, (2) resolution of semiconductor issue, and (3) bottomed-out margins given peaked out commodities. Commercial vehicles have been doing well from past few quarters, passenger vehicles are expected to catch up while two-wheelers are mixed due to sluggish rural demand.
We are more positive on companies in the commercial vehicle, sports utility vehicle and niche two-wheeler segments. We believe players with demonstrated ability of successful transition in electric vehicle will do well over medium term.
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