This should lead to a return to private capital spending as companies seek to further improve utilization, as demand picks up following an easing of the pandemic and geopolitical tensions.
Investment activity could gain ground with improving business confidence, a recovery in bank lending and continued support from government investment spending.
Here are five actions that could benefit or contribute to it.
#1 Larsen & Toubro (L&T)
First on the list is Larsen & Toubro, a multinational conglomerate, with business interests in engineering, construction, manufacturing, technology and financial services.
The company is among the top five construction companies in the world.
In the post-Covid-19 phase, private investments in capital and infrastructure are expected to play a key role in reviving the economy.
L&T stands to benefit as its dominant position allows it to bid wisely for projects in segments such as infrastructure (electricity, roads), urban infrastructure, defense manufacturing and nuclear.
In addition to this, L&T participated in tenders under the PLI program for the establishment of manufacturing facilities for the national ACC battery storage program in India. The program facilitates the reduction of import dependency on ACC batteries and is expected to accelerate the transition to electric mobility
As the energy transition gains momentum, it has also partnered with ReNew Power to enter the developing green hydrogen market. This collaboration with ReNew is a big step forward in L&T’s efforts to develop a green energy portfolio.
The group’s consolidated order book stands at 3.4 t in December 2021, at record levels, with international orders representing a 24% share.
During the December 201 quarter, the company recorded an 11% year-on-year increase in revenue for the December 2021 quarter. However, as it witnessed a decline in other revenue, net profit fell. 5% year-on-year.
#2 Tata Steel
Second on the list is Tata Steel, the second largest steel producing company in India after SAIL.
The company is one of the most geographically diverse steel producers in the world, with operations and a commercial presence around the world.
It has an annual crude steel capacity of 34 MTPA (million tonnes per year)
Tata Steel aims to create an additional 10 MTPA of long product portfolio by 2030, primarily through the acquisition of NINL (Neelachal Ispat Nigam) and subsequent expansion. The capacity will also be increased by installing several EAF (Electric Arc Furnace) on several sites.
The NINL share purchase agreement has been completed and the transaction is expected to close in the June quarter of 2022. Capacity will be expanded to 10 MPTA from 1 MPTA.
The company is also planning to set up a 0.75 MTPA (EAF) in North India near a scrap-generating automotive hub and will consider further modular expansions to the south and west of India. ‘India.
The company is bullish on domestic demand, although commodity prices remain high.
He also believes international demand will be strong due to the impact of Covid-19 given global infrastructure spending and the disruption of supply from Russia and Ukraine.
For the March 2021 quarter, Tata Steel recorded a 38.6% year-on-year increase in revenue and a 46.8% year-on-year increase in net profit.
The company also announced a 10:1 stock split.
Third on the list is Alkyl Amines, the market leader in the ethylamine segment and among the leading manufacturers of methylamine, diethylhydroxylamine and dimethylamine hydrochloride (DMA HCL) in India.
Besides manufacturing basic aliphatic amines such as methylamines and ethylamines, Alkyl Amines has also branched out over the years into value-added products such as amine derivatives and specialty chemicals.
The demand for the company’s products continues to increase in India and abroad. For the year 2022, it plans to focus on increasing its market share of existing products.
Management also indicated that exports will play a major role in revenue growth going forward.
With growing demand for its products, the council recently approved an investment of approximately ₹3.5 billion to increase the capacity of aliphatic amines by 30 to 40% at its Kurkumbh and Patalganga sites in Maharashtra.
The capacity will be added within the next 15 to 18 months and will contribute significantly to the company’s revenue.
For the December 2021 quarter, Alkyl Amines revenue increased 16.3% while net income decreased 45.7%. The company’s input costs skyrocketed, impacting the company’s profitability.
#4 Laurus Laboratories
Fourth on the list is Laureus Labs, one of the leading API manufacturers.
The company recently proposed a capex of ₹15-17 billion spread over the next two years, i.e. until 2023 to further increase its capacities.
Of these investments, 25% will be invested in expanding formulation capabilities, while 50% will be invested in expanding API capabilities. The remaining 25% will be invested in expanding capacity to meet the company’s commercial contract manufacturing needs.
The company has seven manufacturing plants in Visakhapatnam (Andhra Pradesh), an API plant in Bibinagar (near Hyderabad) and a Kilo Lab at its R&D center in Hyderabad.
At its facilities in Vishakhapatnam, it manufactures drug substances while at the API facility, it manufactures both pharmaceuticals and drug substances.
The company expects to achieve a global market share of over 25% in 15 API products, up from 7 products, where it currently holds a 25% share.
Add to that the focus on oncology APIs, where he expects better margins.
For the Mach 2022 quarter, Laurus Labs saw a marginal increase in revenue and a 23% year-over-year decline in net income.
Management remains confident of reaching $1 billion in revenue in fiscal year 2023 versus $660 million in 2022. Growth should be evenly split between synthesis/formulation and the API segment.
#5 Tata Chemicals
Last on the list is Tata Chemicals.
The company is one of the largest chemical companies in India with interests in crop protection and specialty chemicals.
With expansion plans that include lithium-ion cells for electric vehicles (EVs), chemicals, nutritionals and agricultural sciences, the company’s revenue is expected to soar.
Company management has announced its intention to spend ₹24 billion in expansion, of which ₹8 billion have already been spent. The balance will be spent over the next two years.
It has planned an extension of phase II capacity of soda ash (300 kilotonnes) and bicarbide (70 kt) and specialty silica capacity of 50 kt.
This should generate an income of ₹14 billion, with an EBIT of ₹6 billion by FY2025.
Tata Chemical’s usage levels have increased in recent months. With operations now back to pre-Covid-19 levels, performance is expected to improve as demand for soda ash and other products recovers.
For the Mach 2022 quarter, the company reported a 32% year-over-year increase in revenue. Its net profit exceeded 1,500% year-on-year to reach 4.7 billion.
Management said the performance was due to higher volumes, realizations and favorable market conditions.
Has the 2022 budget triggered the recovery of capex?
Note that the higher allocation in the 2022 budget, ₹7.5 tn to be precise, is equivalent to 19% of the total expenditure of ₹39.5 tons. It’s huge.
The last time the capex share hit a similar figure was when it stood at 19.3% for the 2005 financial year.
The economic survey released a day before the budget pointed out that investments had previously been affected by restrictions and labor availability. That has changed now that the restrictions have eased in the second half of fiscal 2021 and the momentum has also continued in fiscal 2022.
Many companies have made huge investment plans in the next three years from 2022. This just shows that there will be a strong recovery.
Aditya Vora, research analyst at Equitymaster, believes that the 2022 budget clearly shows the will to revive private sector investment.
This is a strong push for the capital goods sector, thus benefiting the old economy like cement and steel. According to Aditya, private investment could be the next trigger for the economy.
Here is what he wrote in a recent editorial:
Capital expenditure was increased by 35% compared to ₹5.5 trillion to ₹7.5 trillion. Out of ₹7,500 billion capex, including 25% for roads and highways while defense will get 21%.
What does this mean for the markets?
Simply put, the 2003-2008 period for capital goods and infrastructure is ahead of us.
If the last two years were about public investments made by the government, the next two years will probably be led by private investments.
You can play indirectly on the private investment cycle by investing in steel and cement companies.
Think of the extra cement and steel needed to build roads, highways, hospitals and buildings.
As the tide will be towards tech stocks and new-era IPOs, I think companies in infrastructure, capital goods should be looked at.
Disclaimer: This article is provided for informational purposes only. This is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com