Capex slows in FY25 but key infrastructure, power players set to benefit

Post-election capital expenditure (capex) has been weak at 2 per cent year-on-year (Y-o-Y) in M9FY25.

The FY25 revised estimates (RE) indicate 7 per cent growth in FY25 against FY24, implying 21 per cent Y-o-Y growth in Q4FY25 government capex.

But much of this will be driven by equity infusions into public sector undertakings (PSUs), such as capital support of ₹69,700 crore for BSNL.

The government is likely to miss its capex target in FY25, which, according to the RE, is ₹8.2 trillion, lower than the budget estimates (BE) by 8.3 per cent.

Budget FY26 has an allocation of ₹11.2 trillion, up 10 per cent on FY25RE.

Metro and power capex grew 40 per cent and 53 per cent Y-o-Y, respectively, in M9FY25.

Both metro and power have large private components.

In Q3FY25, overall order inflows were moderate (excluding L&T, aggregate order inflow across sectors may be negative Y-o-Y) for the capital goods sector.

Managements highlighted slower-than-expected pick-up in government capex and absence of private capex.

Many companies, however, retained order inflow guidance.

Sectors like power T&D, data centres, railways and renewables are expected to drive growth.

This means reasonable momentum for players like Cummins, ABB, Bharat Electronics (BEL) and CG Power, although Siemens (excluding energy) had a low-key performance.

Defence capex eased off though part of this is due to its inherently lumpy nature.

Labour issues in water EPC led to earnings cuts for KEC and Kalpataru (KPIL), and Thermax also missed consensus.

Valuations across the sector have corrected somewhat.

Most companies held margins Y-o-Y due to stable commodity prices.

Transformer manufacturers continue to report strong demand, due to supply-demand gaps.

Margins are expected to stabilise as capacities expand in power and distribution transformers.

Many orders are expected to be finalised by March 2025.

The usual suspects remain attractive. Larsen & Toubro (L&T) is the best proxy play for the entire capex and infra sector, while Bharat Electronics is a long-term bet on defence localisation.

ABB and Cummins are also obvious picks.

Among smaller players, KSB, Kalpataru Projects, Praj Industries and Voltamp Transformers could benefit from a capex recovery in FY26.

L&T has order inflows (ex-services) at ₹98,500 crore, up 64 per cent Y-o-Y, driven by strong order inflows in the infra, hydrocarbon, power and defence.

Infra & energy formed 89 per cent of inflows. The order pipeline is at ₹5.51 trillion and the management is confident of surpassing 10 per cent order inflow guidance for FY25.

ABB saw revenue growth of 22 per cent Y-o-Y to ₹3,360 crore with robust gross margins of 41.1 per cent and operating profit margins of 19.5 per cent in Q4CY24.

Order inflows declined by 14 per cent Y-o-Y to ₹2,700 crore from a high base.

The management expects a short spell of moderation before the next high growth phase kicks in and guides for sustainable net margins in the 12-15 per cent range.

BEL’s sales grew by 39 per cent Y-o-Y to ₹5,800 crore in Q3 and the management is confident of surpassing FY25 guidance of 15 per cent revenue growth and upper end of the operating profit margin (25 per cent) and guidance for ₹25,000 crore of inflows for FY25.

This implies ₹14,000 crore of inflows in Q4, driven by defence, despite an order inflow of only ₹11,000 crore till date.

CG Power reported a 42 per cent Y-o-Y growth, led by strong demand for transformers.

The management anticipates an increase in demand for transformers and is setting up a greenfield transformer manufacturing facility of 45,000 MVA at cost of ₹712 crore.

Kalpataru revenues (standalone) grew 16 per cent Y-o-Y to ₹4,830 crore.

The management reiterated 5 per cent profit before tax margin guidance for FY25.

Finance cost increased by 29 per cent Y-o-Y to ₹110 crore and net debt reduced by 30 per cent Y-o-Y to ₹1,820 crore, backed by QIP proceeds.

Given year-to-date order inflow of ₹20,000 crore, the management says guidance of ₹22,000-23,000 crore for FY25 will be surpassed.

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