This is now expected to change. Even the RBI is expecting a revival in the capacity expansion (capex) cycle. Lately, we have witnessed major capex announcements across sectors. Private capex is now witnessing a boom as the demand revives.
Let us first understand how a CapEx Cycle will favour investors
As shown above, if there is an increase in the demand for a product then companies are unable to match the supply. This leads to companies increasing their capacities to expand production. An increased supply then leads to increased sales which in turn creates value for its shareholders.
In the short-term horizon, a company might see margin compression due to investments in capex. The same starts easing as soon as a company starts production from new factories. This makes that company value accretive for its shareholders in the medium to long term.
The Indian cpaex cycle is currently driven by a couple of reasons. First, globally the focus has turned from China to India for their manufacturing needs. This has been favourable for domestic companies.
As the world eyes India for its next order, domestic businesses are ramping up their manufacturing and capex to meet the global supply.
In Budget FY23, the government stepped up the capital expenditure by 35.4% to Rs 7.50 lakh crore in 2022-23 from the previous Rs 5.54 lakh crore. This makes it 2.9% of the GDP. This measure was taken to support the development for which heavy capital expenditure is required.
More companies are qualifying for the Government’s Product Linked Incentive push for domestic manufacturing. It varies across fields from electronics to defence to electric vehicles.
Deleveraged balance sheets of companies coupled with healthy profits are key growth factors for capex to increase. Auto, consumer durables, and infra are among those sectors which have announced major expansions. As this is the beginning of the cycle, it is the right time to invest in these companies.
An investor needs to remain mindful and analyse where the company is investing. An important question to ask yourself is whether the company is generating incrementally higher returns on capex investments. If yes, then you have a stock that can be a big compounder.
Technical Outlook After three weeks of consolidation, the benchmark index witnessed a range breakout and prices are trading above its 21-day exponential moving average which is placed at 17,320 levels.
The overall range for Nifty in the broader time frame is still showing a sideways trend as prices are trading within the range of 16,800 to 17,900 levels from the past more than 2 months.
The momentum oscillator RSI (14) is hovering near the 50 level and indicating a flat trend without any jerks.
The immediate support for the NIFTY is at 17,330 and below the 17,250 level. The resistance for the NIFTY stands at 17,800 levels followed by 17,900 levels.
Expectations for the Week Globally, investors will be closely watching China’s GDP numbers which are slated to release early next week. The series of economic indicators also include industrial production, quarterly retail sales, and monthly unemployment rates. Further, market participants will also observe US GDP Growth Rate QoQ Advance data.
Back home, movements in INR/USD will be closely monitored as Indian Rupee depreciated to a record low. In addition, quarterly results will drive market sentiment as they gather pace. Any management insights that might help predict the future outlook of the earnings trajectory would be much appreciated by D-Street.