A few months back, my friend bought a flat in a posh area of Mumbai.
After the pandemic, he and his wife are working from home. While he always wanted to own a home, it was this phase that turned the slow-burning desire almost into an obsession.
It was a big ticket purchase. And not the end of the story. For the next few weeks, about a month, with a substantial budget, were devoted to outsourcing interior design work, including furniture, plumbing, and paint.
He bought things he didn’t really need – a new refrigerator and washing machine. The fully functional old one was removed on OLX.
This was easily 8% of his investment in property.
Now it may not seem like much in percentage terms. But it is a significant amount considering the kind of investment made in a property.
Every time a home is bought, it spends in other categories as well, towards most of the things that go into the home. No wonder housing sales are considered a leading indicator for the economy.
Now it was not a standalone example. Despite the rise in lending rates, booking and housing prices are firming up.
While global events such as russia ukraine warWith FIIs exiting and the US Fed rising interest rates are all in the headlines, more pertinent factors indicate that the economy’s prospects are being overlooked for years to come.
Another issue is the spurt in deleveraging of corporate balance sheets and capex activity.
The government has increased its capital expenditure target by 35 per cent to Rs 7.5 lakh crore. There is a strong possibility that this will bring in private capex, thereby starting a good cycle.
What causes short-term pressure on profits? the supply chain Issues and inflation. But corporates have been more confident about long-term demand in the last few years. They are putting in capex to make it happen. This is backed by healthy balance sheets, high capacity utilization and healthy cash flows of banks.
An enabling environment with strong government intent to revive the infrastructure and make the country self-reliant is another positive.
Schemes like PLI have been given impetus.
In my view, the impetus from this capital expenditure revival would not be limited to the infra and capital goods sector only.
As I shared in the example at the beginning, there will be positive ripple effects in many areas.
so what can happen capital expenditure revival Meaning for the stock market?
Let’s look at history for some answers.
India saw one of its strongest capex cycles in 2003-2007. And thus the market boomed.
Those who took advantage of this opportunity potentially made some of the biggest gains in a decade.
Now this is not as easy as it sounds.
Consider the case of the painted area.
A few weeks ago, Grasim had announced an aggressive capex plan in the paint sector. It increased the planned capital expenditure from Rs 5,000 crore to Rs 10,000 crore. It has a target of 1.33 billion liters of capacity. It is very close to the market leader Asian Paints.
It’s not hard to imagine what it could do for current players. Increased supply is likely to increase competition and pricing pressure.
No wonder major companies including Asian Paints and Berger Paints witnessed sharp selloff.
This is going to be a common issue in some other areas as well.
Hence the huge capital expenditure employed in a particular sector can change either way for the sector’s stocks. It will depend on the dynamics of supply demand.
So how can you be on the right side of the capex bet?
Well, I would look for companies that are suppliers for the entire industry and not for any specific company in this sector.
For example, in the above case, there is a smallcap company that is a significant supplier to paint companies including, but not limited to, Asian Paints.
What makes this an even more hedged bet is that the company isn’t focusing on one particular area. It is also a supplier to food and FMCG and pharma companies. And customers in these areas too are likely to benefit from the capex expansion.
Another factor I’m looking for is the quality of the balance sheet. The track record of the promoters is also important. Have they executed projects in the past? How good is their capital allocation skills.
For example, my . one of High Confidence Smallcap Recommendations The infrastructure boom is the beneficiary of rising housing demand, construction, accelerating the capex cycle and the government’s increased focus on water supply.
I wouldn’t give weight to these tailwinds if it weren’t for the company’s old balance sheet, and the fact that most of its ongoing capex plan is self-funded.
While the capex cycle of 2003-2007 drove many smallcaps into midcaps, a blinding participation in thematic plays prompted investors to bet on stocks such as Suzlon Energy and Unitech.
As you prepare to benefit from perhaps one of the biggest themes of the decade, don’t take your eyes off fundamentally strong stock and margin of safety in valuation.
Stay tuned for more such investment updates…
Disclaimer: This article is for informational purposes only. This is not a stock recommendation and should not be treated as such.
This article is syndicated from equitymaster.com
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)