Capex Ramp-Up To Continue Says Jefferies, But Suggests Investors To Take Calibrated Approach

There has been a significant uptick in capital expenditure, according to Jefferies. But despite the uptick, spending is not spread evenly across sectors. Stocks like Siemens Ltd., Hindustan Aeronautics Ltd., KEI Industries Ltd. and Larsen & Toubro Ltd. are on the brokerage's watch list.

Mahesh Nandurkar, the head of research and managing director of Jefferies, expects 50% growth to continue in February and March, as this is in line with revised estimates of the budget.

"These are on expected lines but the fact that its happening, gives confidence. Next year's numbers, about 10% or so, it could be lower if there's revenue short fall, which I think is likely. A lot will depend on whether the government kind of upfronts the capex and if it continues," said Nandurkar.

The second half is expected to be weaker as the full year basis will be at around 8-10%, according to the analyst.

"One needs to take a more of a calibrated approach. The market is cautious on private capex. I believe that private capex is already happening in sectors like cement, steel, hospital and real estate," he said.

While these names need to be monitored, the capex may be weaker in roads. The government is looking to revive the road projects and investors should wait and watch if private sector players jump in there, he said.

There are some who have shown incremental interest but the numbers may be on the weaker side, he added. Siemens should benefit from revenue and margin recovery in the power division, Jefferies said. This is supported by the improved visibility in spend in the area. The power demerger is an additional trigger for the same, it said.

Hindustan Aeronautics has a five-year growth visibility of 20%, driven by indigenisation, which should keep multiples elevated, according to the brokerage. KEI is also highlighted as a play on housing and power transmission. L&T has low investor expectations built in. This should lead to stock upside on guidance delivery, Jefferies said.

The central government capex rose 51% year-on-year in January 2025, Jefferies noted. Capex on ex-telecom and Department of Economic Affairs saw a 10% uptick year-on-year against 5% earlier. Transfer to states is also up about 60%, it said.

The government intent on capex spend will need to be monitored closely for industrial stocks, the brokerage said. It also adjusted the BSNL infusion, which reflects in the telecom capex as it is mainly for funding losses against capex.

Road capex growth of 3% and rail capex growth of 4% year-to-date is in line with government's financial year 2025 revised estimates. Government's enhanced focus on roads and railways from 2020 reached a stage of lower growth, according to analysts. About 83-87% capex of financial year 2025 revised estimates has been achieved till date for rail and road respectively.

The defence spend declined 4% year-on-year. The brokerage estimates that 19% growth is needed in February-March to meet the revised estimates. Financial year 2026 budget indicated defence capex growth of 13%, against 3-8% previously.

Indigenisation focus remains intact and is highlighted in the Ministry's January 2025 press release mentioning 2025 as a year of reforms, Jefferies noted.

Transfer to states is up 4.6 times in January 2025, the brokerage firm noted. Afcons' management in their third quarter call highlighted that road development should accelerate through state level initiatives following central government's financial support.

The brokerage's analysis of 14 states suggests that January saw 2% decline. State capex has been volatile with rise seen in July, August, October and December and decline seen in most other months. Only 49% of the budgeted estimate has been achieved so far for these 14 states combined.