Obsessed with consumption stocks? You might just miss this goldmine

NEW DELHI: If you are looking at consumption as a big stock investment theme in the hope of big pre-election sops for rural India, think again.

Capex revival might just turn out to be a more rewarding theme.

There are early signs of a revival in the private capex cycle, as signalled by improved capacity utilisation levels across industries. Reasonable valuations and strong short-term earnings visibility are key factors making these stocks look attractive.

Capacity utilisation
Minutes of December 3-5 monetary policy committee meeting bear this out. It says capacity utilisation, as measured by the RBI’s order books, inventories and capacity utilisation survey, rose to 76.1 per cent in September quarter from 73.8 per cent in June quarter.

This was higher than the long-term average of 74.9 per cent.
High frequency indicators are also hinting at an improvement in industrial activity during December quarter. If utilisation rates sustain above 75 per cent, it portends a revival in capex, said Elara Capital.

Data showed capex of the BSE500 companies rose 32 per cent compounded annually in the FY06-11 period, only to slow down to 4 per cent over FY11-18. The capex intensity was particularly weak for smaller-sized companies.


During this phase, the share of government projects as percentage of projects under implementation jumped to 60 per cent.
Data showed new orders for engineering and construction companies doubled in September quarter. While backlogs grew 19 per cent, execution rose 21 per cent YoY.

Nomura India expects capital goods companies such as Cummins India to benefit from strong momentum in construction equipment demand, strong demand for rail power cars, increased infra spending driving core power generation sales, and signs of a revival in the commercial real estate segment. The foreign brokerage is bullish on L&T on expected pick-up in execution and margins, and prefers PNC Infratech and KNR Construction among smallcaps due to their valuations and strong growth.

Nomura expects private capex to recover gradual over the next 2-3 years.

While it is expected that the government will now cut down on capex spending to make room for populist measures ahead of the elections, such a slowdown in public capex spending may just be temporary, lasting two-three quarters. All eyes would be on order execution.

“Our deep-dive into E&C (engineering and construction) company backlogs indicate they are almost full, to take care of the ensuing slowdown in awards during Mar-Jun and Sep 2019,” CLSA said.

CLSA recommends a ‘buy’ rating on L&T on improving core earnings growth, expanding return on equity (ROE) and a $1.3 billion share buyback. It also prefers Sadbhav on likely churn of assets and acceleration in execution and J Kumar Infra as urban infra play.

Meanwhile, not many analysts feel any consumption-boosting rural package is in the offing. The feel given the fiscal deficit, which has already breached the Budget estimates for FY19, a big bang announcement is unlikely.

They noted that rural wages fell in 2018 as previous policy attempts by the Modi government in the form of MSP hikes, soil health cards and establishment of e-NAM proved insufficient to alleviate the immediate rural distress.

“While any relief package to farmers would surely have some positive impact on two-wheeler, tractor and FMCG sectors, but its impact on stocks will be shortlived, as investors may prefer to book profits and be in cash ahead of the elections,” said G Chokkalingam Founder at Equinomics Research.