Bank of America believes that India is at the start of a multi-year domestic capex upcycle. So capital goods companies are at a great juncture where they can leverage on the cycle to grow well. However, the house also sees a huge potential for exports. The house believes that exports will push the sector’s ROEs and profitability especially given the lower utilisations.
Management commentaries have also been suggesting that there are export opportunities and of early signs of a pick-up in exports. The house though believes that major economies have rebounded with large capex programs. The USA for instance has passed a bill for infrastructure stimulus worth USD 1 trillion. Bank of America therefore believes that this may be a great opportunity for the likes of Larsen & Toubro, Adani SEZ & Container Corporation of India amongst possible beneficiaries.
The house also believes that there is huge scope for industrial stocks exposed to the exports theme to do very well in this environment. The house has reiterated an overweight stance on Industrials. The house says that overall there are several drivers for step-up of exports by Industrial firms especially having the ambition to expand exports. It sees some industrials having relatively low utilizations at 50-85%.
The house also sees some Indian subsidiaries of MNCs getting support from parent cos in US/Europe and several companies in India undertaking acquisitions geared towards export markets. Bank of America also points out that there are several MNCs which treat India as a great manufacturing support base.
The management of ABB India has been cited as stating that there is enough headroom to cater to the ‘interests of the group in using India as an export base’, given the ongoing expansion of certain plants/ surplus land banks for further expansion.
The house points out that several companies the likes of Cummins, Honeywell, Grindwell Norton, Timken and even Kalpataru and KEC in the power space have substantial export volumes and hence may benefit from the tailwind in markets abroad.
