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MOSL: CAPITAL GOODS: Industrial capex – On recovery path; Oil & Gas, Steel and Cement capex to drive revival over FY17-21

Capital Goods: Industrial capex – On recovery path; Oil & Gas, Steel and Cement capex to drive revival over FY17-21

 

• After a decline over FY12-17, green shoots of recovery are visible in industrial capex. We expect Oil & Gas, Cement and Steel capex to be the key drivers of this recovery over FY17-21.
• Capex growth in consumer-oriented sectors (Auto, FMCG, Consumer Durables) would remain steady during FY17-21; Pharma could see a decline on sector headwinds.
• Our top picks to play the industrial capex recovery are Engineers India (BUY; TP: INR200), Thermax (BUY; TP: INR1,350), L&T (BUY; TP: INR1,670), and Cummins India (BUY; TP: INR1,040).

 We have done a deep dive into the capex plans of the companies constituting the BSE 200 index (representative of the industrial capex cycle in India, in our view) over the period 1995-2021. Our key findings:

 Green shoots of recovery in industrial capex visible

Industrial capex in India has been subdued over the past 5-6 years, as reflected in the weak capex spends of Indian companies, corroborated by weak orders for equipment suppliers and muted industrial credit growth. However, capex by consumer-oriented sectors like Autos, Telecom, Media, FMCG, Food & Beverages and Consumer Durables/Electronics has continued largely uninterrupted. Post the cyclical downturn in the core sectors, we are starting to see green shoots of recovery in sectors like Oil & Gas (O&G), Steel, Cement, and Fertilizers, which should strengthen hereon. Private sector capex in the Power sector will be towards renewables; a revival is unlikely in coal-fired plants.

 Oil & Gas capex driven by BS-VI emission upgrade, and expansion in Refining, Petrochemicals and Fertilizers

Capex in the O&G space is being driven by BS-VI emission norm-related upgrades (INR300b spend) along with brownfield/greenfield refinery expansions by state-owned oil marketing companies. Additionally, five fertilizer plants are also being revived, providing further capex opportunities in this space. We estimate total O&G capex over FY17-21 at INR2.2t (8% CAGR ex Reliance and ONGC). Ordering in the sector has begun – Engineers India is already sitting on a multi-year high backlog; equipment suppliers and EPC contractors (Thermax, L&T, ABB, and Siemens) should benefit over the next few quarters.