Citi starts coverage on six industrials; sees capex entering consolidation

Citi said that it prefers execution leaders exposed to key thematics, with Cummins India and Bharat Electronics as its top picks

Citi Research has initiated coverage on six Indian industrial companies, noting that the country's capital expenditure (capex) cycle is transitioning from an acceleration phase to consolidation. 

 

The brokerage said that it prefers execution leaders exposed to key thematics, with Cummins India and Bharat Electronics as its top picks, with 'Buy' calls. It also initiated coverage with 'Buy' ratings to Larsen & Toubro and Hindustan Aeronautics, a 'Neutral' rating to Siemens Ltd., and a 'Sell' rating to ABB India.

 

The brokerage highlighted that government investments remain elevated, providing continued support to the sector. Citi said that a few key thrust areas continue to see traction, and with corporate balance sheets in stronger shape, the consolidation phase is expected to lay the foundation for a broader capex cycle over the medium term. 

 

However, near-term private capex growth is likely to remain selective, focusing on segments aligned with policy priorities and demand trends. "Our optimistic view is premised on India's infrastructure and industrial buildout being a multi-decade opportunity. While near-term, the government-funded core infra capex after an acceleration over FY22-24 is now consolidating, it still remains the key driver." 

Corporate capex 

Citi noted that corporate capex momentum has moderated following an uptick in FY24, with divergent trends across sectors. Power utilities and sunrise sectors such as datacenters, renewables, electronics, and semiconductors are attracting new private capital spending and announcements.

 

The brokerage added that a broad-based capex revival is likely further away, as capacity utilizations need to improve. Citi observed that, before the global financial crisis, private capex surged sharply, aided by high utilisation levels. Easing global uncertainties and sustained domestic demand growth will be key to a wider recovery. 

Valuation remains elevated 

Citi said that valuations of Indian capital goods stocks remain elevated despite a recent reset, with the MSCI India Industrials index trading at a premium to historical averages. While some selective pullbacks have occurred, certain stocks have outperformed by sustaining growth and margins, it said. 

 

With central capex moving from an acceleration phase to consolidation, Citi expects relative returns going forward to be driven by bottom-up stories that offer clear growth visibility and margin stability, supported by select thematic opportunities.

 

However, Citi highlighted two major downside risks for the sector. A weaker-than-expected government capex trend and prolonged raw material price volatility or supply chain disruptions may weigh on margins and execution timelines, it said.