In the industrial space, BNP Paribas expects capital expenditure to bring some spending into the energy space. It also has a much more positive outlook on the transmission and distribution space, when compared to the defence space, which is overvalued, according to analysts.
India witnessed major investment-led growth with a thrust on transport infra, which is road and rail over financial year 2015 to 2024. This movement was supported by a pick-up in public capex. Now, capex in these segments has slowed, specially from the central government. Capex in key segments has fallen by 8% year-on-year.
"We find the slowdown to be particularly prominent in roads, defence and water projects. We expect capex over financial year 2025-30 to orient away from public-capex-led transport infrastructure spends, to a more balanced spending on energy infrastructure generation and its integration into the grid by transmission and distribution, according to the firm.
There is a strong pipeline of renewable EPC projects of 100GW+ and tenders for setting 50GW of thermal power plants under bidding or planning. It expects these to drive capex in power generation.
It estimates 500GW of renewable energy capacity to be in place in India by FY32, up from 180GW currently. The government also has a target to tender out more thermal power plants of up to 80GW to support the demand for peak power. The integration of these power capacities to the grid would require significant transmission spends over FY25-32, according to the firm.
Transmission And Distribution
Key government authorities are facing high debt levels, because of which, their reliance on budgetary support from the central government has increased, BNP Paribas highlighted.
"We believe capex levels are nearing peaks, with limited scope to rise in the near term, particularly for roads and railways. Defence capital-spend hikes have been modest and growth is limited to localisation opportunities," according to analysts.
Defence tendering process remains difficult and subject to multiple layers of approvals, it said. This deters rapid tendering and the valuations of firms in the domestic defence space have increased sharply over the last four years.
BNP Paribas, avoids exposure to the defence space as its expects the strength in T&D tendering to likely accelerate over FY25-30.
Top Pick
For 2025, Larsen & Toubro Ltd. is BNP Paribas' top pick in the industrial space. It has observed some negative and cautious sentiment on the stock, especially fears of a capex slowdown in India. There are also concerns that L&T may miss its order inflow growth guidance of 10% this year. There are also concerns on whether the increase in west Asia capex may sustain, given moderate outlook on oil prices.
"We believe this pessimism is overdone. We expect L&T to not only meet its order inflow growth guidance of 10% in FY25, but also be relatively less impacted by the public capex slowdown, given its well-diversified sectoral exposures. We also believe that not only can the uptick in Middle East capex sustain but also may accelerate over the next 2-3 years," according to the firm.
This move is set to come into energy, T&D and renewable energy. L&T's relative positioning in the industrial and infrastructure sectors has made it the top pick because of the optimistic outlook for its earnings growth and ROE improvement.
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