Capital goods: Capex push likely in Union Budget to support growth

The Budget is expected to push public capital expenditure (capex) and simultaneously create a conducive environment for private capex.
 

This would mean raising allocations towards sectors such as defence, railways and renewable energy transmission projects, perking up the domestic capital goods industry, brokerages said.

“We expect a marginal increase in allocation for defence along with higher allocation for railway and railway electrification, SMART cities and water projects among others,” said Edelweiss Research.

Larsen & Toubro (L&T), KEC International, Thermax, ABB India, Cummins India and Apar Industries are some of the capital goods companies in the domestic market.

L&T will be a major beneficiary in general, given its exposure to core segments, said Edelweiss. Some clarity on the National Infrastructure Pipeline (NIP) and funding of infrastructure projects would augur well for the sector, it added.

The government launched NIP with an initial capital outlay of about Rs 102 trillion to cover fiscal years between 2019 and 2025. The output of capital goods in India’s index of industrial production had contracted for November 2021.

On the ongoing third wave, brokerages feel that even though Omicron has a high infection rate, its fatality rate is much lower. Hence, its impact on the economy would be limited.

“We anticipate the life of the third wave to be short and taper off by mid of March ’22. We retain 'overweight' and believe strong growth tailwinds for the capital goods sector,” said Prabhudas Lilladher in a report.

“With increasing focus on clean energy we expect fiscal support or policy measures to boost clean energy adoption. We retain L&T, Siemens and ABB in our model portfolio and increase weight on ABB by 50 basis points,” said the report.

Ordering activity has accelerated in the October-December quarter and is expected to report strong growth in H2FY22, said brokerages.

The key monitorables would be ordering activity and pipeline, management guidance, project execution pace, gross margins and working capital requirements.

Brokerages recommend companies with strong balance sheets, low debt levels, good corporate governance, well managed working capital cycle and long-term scalability.