Data regarding private-sector capital formation in India roughly indicate a 12-year cycle – an upswing from 1991 to 1996, followed by a downswing from 1997 to 2002.
Extending this, the present cycle has completed its six-year upturn (2002 to 2008). So, are we seeing the beginning of the next downtrend? More important, if this continues, would the next private capex upswing be after six years?
In the previous downswing and subsequent slump in private capex, global money played a large part. Following the Asian crisis in 1997, we saw a flight of capital from emerging markets.
The current crisis, being of global proportions, could take longer to resolve, indicating that the trough could be longer and lower than in the past.
Data indicate that such private-sector capital-formation may have peaked and may already be on the downslide. This would also imply that, from now, public investment is likely to drive infrastructure formation.
We iterate that, in the present careening environment, the sector as a whole is under a cloud.
Within the sector though, our pick is still Bhel due to its huge exposure to government-mandated capex. The stock trades at 15.5x FY10e. We have a HOLD rating on the stock.