If you buy capex revival theory, here’s CLSA’s cue to bet on it

The Indian economy is witnessing the first signs of capex revival as order backlog remained robust in December quarter amid robust execution growth.

Global brokerage CLSA said a turn in India’s capex cycle was validated by third quarter backlog growth of over 12 per cent year-on-year (second highest in 22 quarters) despite execution growth accelerating to 12 per cent YoY (also second highest since 2012).

The global brokerage firm said state government capex coupled with central capex and pre-election push would be the key drivers.

Since the beginning of this financial year, domestic order flows grew 21 per cent on a year-to-date basis led by construction and non-power capital goods sectors (over 78 per cent). However, domestic order flow declined 15 per cent YoY in Q3FY19.

CLSA said those who want to play the capex recovery theme should buy early cycle plays, such as L&T, Sadbhav Engineering, NCC, IRB and JKumar Infra Projects.

Since the beginning of 2018, shares of J Kumar Infra Projects have tanked 61 per cent till February 19, while those of NCC and Sadbhav Engineering have dipped 37 per cent and 61 per cent, respectively.

L&T, however, remained almost flat since January 2018. Shares of companies linked to the capex revival theme are trading at the lower-end compared with average price-to-earnings. Besides, bill-to-book ratio is also hovering at around all-time high levels on an aggregate basis.

Stocks are trading at -1 standard deviation on PE amid uncertainty over a potential change in government, CLSA says.

“The key message from our analysis of 30 engineering and construction companies with a backlog of $119 billion was that there has been an across-the-board pick-up in India’s infrastructure capex cycle, leading to near all-time high BTB ratio (2.8 times) despite a pick-up in execution and margin expansion (led by non-power segment over 430bps) of E&C companies,” said CLSA.