Home / Markets / Mark To Market /  After higher capex boost, over to execution now for infra companies’ stocks

MUMBAI : Capital expenditure outlay of 7.5 trillion for FY23, a key highlight of Union budget 2022, left investors visibly pleased. The S&P BSE Capital Goods Index was up about 3% on Tuesday.

Among the stocks, Larsen & Toubro Ltd (L&T) closed 4.5% higher on the NSE. L&T is often seen as a proxy for the country’s infrastructure development as government orders account for the majority of its total order book.

“A 25% year-on-year (y-o-y) rise in capex outlay spend (budgeted estimates versus revised estimates) is a positive for the (infrastructure and contractors) sector, including L&T ," said analysts from Jefferies India in a Budget Flash report on 1 February.

Another beneficiary is the cement sector, where infra-spending is the second largest contributor to the industry’s overall demand. Small wonder, Ultratech Cement Ltd, Ambuja Cements Ltd, and Shree Cement Ltd, among others, rallied more than 4.5% each on NSE.

A similar optimism was seen in the stocks of road construction companies, which rose intraday on NSE after finance minister Nirmala Sitharaman announced that the target is to expand the National Highway Network by 25,000 kilometres in FY23.

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Prima facie, investors have cheered the capex-related budget announcements. But, analysts point out that the details of this capex plan may not be as exciting as they seem.

“Of the total capex basket, infrastructure capex (which has a higher multiplier impact on the economy) is budgeted to rise relatively lower at 11% in the upcoming fiscal with gross budgetary support rising faster at 30%. Within overall infrastructure basket, railways, renewable energy, and water sectors have seen the highest growth. Roads will see a meagre 0.8% rise in next fiscal over fiscal 2022RE," said Isha Chaudhary, director, CRISIL Research. It should be noted that the infrastructure capex includes road, railway, airport, port, housing, power, new and renewable energy, water, and rural development.

Some market experts also said the road development plan seems to be ambitious given the government’s poor track record in this regard.

Another potential beneficiary would be KEC International, according to Arafat Saiyed, senior research analyst at Reliance Securities Ltd. “But," he adds, “now, what matters is how much of this (capex) actually translates into an uptick in the order books of these companies... The stocks have reacted positively, but an earnings upgrade for these stocks depends on execution of the said announcements."

Meanwhile, some economists hope that with increased thrust on infra-led capex, the government’s flagship National Infrastructure Pipeline (NIP) project may now start having a meaningful impact on the country’s infrastructure investment landscape. The NIP looked impressive on paper, but a lack of funding risked dampening its impact on long-term growth prospects, according to Capital Economics.

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