Volatility Clouds Over Infra Stocks As India's Capex Thrust Likely To Ebb

Amidst a broader selloff, India's infrastructure stocks are poised for heightened volatility with analysts expecting the capital expenditure thrust to ebb in the upcoming Union Budget 2025.

The onus for economic growth revival will fall on the Reserve Bank of India as the Narendra Modi government eyes tighter consolidation, they say, as Finance Minister Nirmala Sitharaman will unveil the Budget on Saturday, February 1.

Jefferies has a "cautious" view on the Budget given the expected slowdown in government's capex. A high base in revenues and the government's firmness on fiscal consolidation will likely limit any significant spending growth, Jefferies said.

The gauge for domestic infra stocks — Nifty Infrastructure index — has taken a plunge along with the other stocks and broader indices weighed by slowing economy and geopolitical woes. 

The infra index has fallen over 15% from its peak in September last year, taking the fall to the fourth consecutive month in January, the longest losing streak since February 2016.

Since the beginning of the selloff last year, Samvardhana Motherson International Ltd., Indian Oil Corp Ltd. and Gain India Ltd. have been the worst performers with losses of more than 30%. Only Indian Hotels Co. and Shree Cements Ltd. have been the gainers since then.

In Modi government's third term so far, the intensity on capex has not come forth. The government is set to clock around Rs 9.5 lakh crore in fiscal 2025 based on the current run rate, which would be about 15% lower than the budget estimate of Rs 11.1 lakh crore.

According to Kranthi Bathini, director, equity strategy at WealthMills Securities Pvt, the strong momentum of capex will continue going ahead in the Budget as it is integral to India's growth plan. The public capex momentum will continue along with encouraging private capex, he added. There will also be greater emphasis on the semiconductor industry which needs private and public capex, said Bathini.

The spending power is likely to be limited by lower deficit targets and indirect tax income and slow capital gains tax contributions, according to analysts at JPMorgan. However, "the budget will continue to prioritize infrastructure and public investment, with some support for consumption."

Amid calls for higher capex push, CLSA echoed the views that the capex growth will be curtailed. The brokerage said that the government will stick to its commitment of a 4.9% fiscal deficit in financial year 2025 and 4.5% next year, requiring the government to curtail growth in capex in both fiscal 2025 and 2026. "This may be seen as a disappointment versus the high expectations baked into capex-linked stocks."

Railways, housing, urban infrastructure and defence will be among the key sectors to watch out for in the finance minister's speech. Further, raising disposable income and boosting rural and urban demand will likely be the top agenda.

The so-called 'Modi stocks' — an index of 54 stocks coined by CLSA — are expected to remain gloomy as the Budget may remain firm on fiscal deficit target.

The underperformance of the 'Modi' basket of PSU and capex stocks may continue, according to CLSA. Coming after four years of 25%-40% year-on-year growth, the capex-linked stocks may be seen as a disappointment versus the high expectations, it said.