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MOSL: INDIA INDUSTRIALS-Identifying key themes for CY19; Capex recovery to gain momentum post general elections in May’19

India Industrials: Identifying key themes for CY19; Capex recovery to gain momentum post general elections in May’19

 

As we step into the last month of CY18, we present the key themes that are likely to play out in the Industrials’ space over next year. In this note, we list down our thoughts on CY19 and our preferred stock ideas.

 CY19 a two-faced coin: Orders to slow in 1HCY19 and bunch up in 2HCY19

Orders are the lifeline for the Industrials’ sector companies as these provide revenue visibility and have typically led the re-rating /de-rating of stock prices in the sector. While 1HFY19 witnessed preponement of orders due to the upcoming state and central elections, Q419/1HCY19 should witness a visible slowdown from both the government (as the government machinery gears up for the general elections) and the private sector (deferment of orders till after the elections). However, historically there is a bunching-up of orders in the quarters following elections; and in the case of 2HCY19, we don’t believe it would be otherwise (See Exhibit 1). It is imperative that investors position their portfolios for the impending revival in orders in 2HCY19 while seeing through the transient slowdown in 1HCY19.

 Finally, a revival of industrial/private sector capex

The much delayed and widely discussed revival in private capex is finally starting to materialize, in our view, and would gain further momentum after the general elections. While we have already seen a pick-up in consumption-oriented sectors (Auto, Pharma, Consumer Electronics, F&B), the recovery is set to get more broad-based with Refining, Cement and Steel also joining in (See our recent note: ‘India Industrials: Reminisces from the past cycles; pockets of recovery evident’). Moreover, we do expect momentum in the cycle to continue for the next few years as a pick-up in end-market demand drives higher capacity utilizations and resultant capex (Exhibit 2 and 3). Thermax, L&T, Cummins India and Engineers India are our key BUY ideas to play the industrial capex recovery.