Jefferies, a leading foreign brokerage, anticipates a prolonged upswing in corporate spending and the housing cycle, projecting a five-plus year growth trajectory. These sectors, constituting 75% of the total capital expenditure (capex), emerge as major drivers.
Jefferies suggests that any potential dip in capex plays, influenced by waning confidence in government-led initiatives, could present a strategic buying opportunity. The brokerage identifies Larsen & Toubro (L&T), State Bank of India (SBI), Lodha, Godrej Properties, Ultratech Cement, Thermax, Polycab, KEI, Kajaria, JSW Energy, and Coal as its preferred capex cycle plays, signaling positive prospects for investors in India’s evolving capex landscape.
The report also anticipates a modest 7-8% growth in the government capex budget for the fiscal year 2025 in the upcoming interim Budget. Jefferies suggests that this relatively lower projection might disappoint the market, potentially leading to corrections in stocks linked to the government capex program.
As a response to this outlook, Jefferies has adjusted its model portfolio, lowering Larsen & Toubro Ltd’s weight to neutral and reallocating it to Adani Ports. The brokerage firm cautions that stocks associated with railways and defence capex programs could experience subdued performance.
Furthermore, Jefferies highlights the pressure on the government to increase welfare spending amid fiscal consolidation, implying a quest for additional revenues. While immediate tax hikes are not expected due to upcoming elections.
Jefferies speculates that post-election measures, such as higher capital gains tax, may be implemented during the year. Additionally, the brokerage foresees an increase in disinvestment post-elections, leveraging the strong performance of PSU stocks in sectors like railways and defence.
Despite these challenges, Jefferies remains optimistic about the capex cycle, emphasizing that 75% of the capex in the economy is driven by housing and private corporate activities, both of which have considerable upside potential over the next few years.
Jefferies notes that the housing upcycle is currently in its third year and predicts an additional five-plus years of growth. For the corporate segment, the brokerage points out that overall capacity utilization is at a 12-year high, citing examples such as cement and power industries.
Even if government infra capex spends cool off in 2024 under budgetary constraints, Jefferies believes that substantial housing and corporate spending will propel capex levels higher.
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