'Strong Recovery' In Government Spending To Trigger Rally In Capex Themes

Defence and roadways are expected to benefit from the "strong recovery" in central government capital expenditure in the second half of the current fiscal, according to Emkay Global.

The brokerage said defence, roadways, and communication could show a sharp sequential jump. Railways are, "surprisingly" ahead of the full-year run-rate and may not show strong second-quarter seasonality, the firms said in a note on Dec. 10.

"Our meetings in Delhi earlier this month, on-ground feedback, and movement in government balances seem to indicate the same." The growth for the year will look more impressive because of front-loaded expenditure in the last fiscal, the note said.

The consensus view was that the capex slowdown in the first half was largely led by the elections and the monsoons, it said. "A robust recovery is expected in the second half of the year, with many projects now being bid out and execution likely to accelerate."

The recent trend toward welfare spending by state governments is a headwind, Emkay pointed out. This is due to enforcement of the 3% limit on state fiscal deficits. The recent acceleration in revenue expenditure by states will hurt the capex of state governments, it said. "It is left to the central government to do the heavy lifting on capex, going forward."

Commercial vehicles, capital goods, and select infra financiers are the best ways to play this recovery, Emkay said. Larsen & Toubro Ltd., HG Infra Engineering Ltd., Hitachi Energy Ltd., Voltamp Transformers Ltd., and Ashok Leyland Ltd. are the top picks for Emkay after having filtered for valuations and recent underperformance.