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smallcase in focus | February, 2024

smallcase in focus | February, 2024
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How did government’s push led to the turnaround of few market sectors?

In a remarkable turn of events, the Indian government’s strategic initiatives have spurred the revival of sectors that experienced a prolonged period of stagnation over the past decade. After COVID-19, our government was quick to understand that capital formation will be instrumental to the recovery of our economy. And with a tough business environment, private capital expenditure (capex) wouldn’t come through. Therefore, the government took the initiative to spend generously on the country’s infrastructure in order to spur economic growth.

Look at the way Gross Fixed Capital Formation (GFCF) as a % of GDP began to trend up since FY22. For the uninitiated, GFCF is an indicator of the production of physical assets (machinery, buildings, roads) in the economy. 

Similarly, if we exclusively look at the growth in government capex, the picture remains the same.

Let’s now move from the broader picture and talk specifics. Sectors such as infrastructure, energy, and realty have had a tough time in the past on account of various reasons. And since the pandemic, we have seen a dramatic turnaround in all of them and mainly because of one common factor –  capex. And this transformation is evident not only in the operational landscape but also in the bullish trends observed in the stock markets.

Realty Sector: Building a New Horizon

The real estate sector, which had been grappling with challenges such as liquidity crunch and unsold inventory, has experienced a paradigm shift due to the government’s targeted interventions. The Indian housing cycle caught an upswing post 2020 after a 7+ year long consolidation period. The boom is of that extent where housing inventories are at a 12-year low and demand is outpacing supply. Housing volumes have surged ~25% in 2023, almost double in 3 years.

The push for affordable housing and the implementation of Real Estate (Regulation and Development) Act (RERA) have injected a renewed sense of confidence among both developers and homebuyers.

Recent data indicates that the government’s capex in the realty sector has witnessed a substantial increase, reaching ₹1.8 lakh crore. This capital injection has fueled infrastructural development, affordable housing projects, and improved connectivity, breathing life back into the real estate market. Even after property prices have shot up, there seems to be no roadblocks as far as sales are concerned. Take a look the housing inventory which is at a ~12-year low.

Energy Sector: Powering Up the Economic Engine

Over the past decade, the energy sector in India has faced multiple challenges, including regulatory hurdles and financial constraints. However, the government’s relentless push for increased capex in the energy infrastructure has ignited a substantial turnaround. Take a look at the trend in power capex which suggests the turnaround.

The renewable energy sector alone has witnessed an investment inflow of over ₹1.4 lakh crore, contributing not only to the nation’s clean energy goals but also to job creation and economic development. This surge in capital expenditure has translated into substantial improvements in the energy sector’s performance. The addition of new power generation capacities, particularly in the renewable energy segment, has propelled India to new heights. Capacity utilization, which is a key metric in the energy space, is trending at all time highs.

Infrastructure Development: Paving the Way for Economic Growth

Beyond energy and realty, the government’s emphasis on infrastructure development has been a pivotal driver of economic growth. The increased capex in infrastructure projects has not only created jobs but has also stimulated demand for materials and services across industries. As a result, the ripple effect of this strategic investment is evident in the improved financial performance of companies associated with infrastructure development. 

The National Infrastructure Pipeline (NIP), with an estimated investment of ₹111 lakh crore over the next five years, has emerged as the major proponent for the infrastructural development in the economy. NIP has acted as a catalyst for various sectors, including transport, logistics, energy, roads and the likes.

One of the outliers has been the progress we have made on roads. National Highway Network has increased by an impressive ~60% from 91,287kms in 2014 to 1,46,145 kms in 2023. The source of the data & the chart is Ministry of Road Transport & Highways.

The interesting aspect around infrastructure is the way each sub sector is interlinked to one another. Now, since we are amidst a housing boom, the prospects for sub sectors like materials (cement, building products) have also caught the uptrend. 

How has the markets responded to this capex cycle?

As mentioned, sectors that we have discussed in this writeup have had their fair share of turbulent times. Besides just acting as an economic multiplier, the capex spending from the government has given an impetus to the stock market performance as well. Take a look at the table below which highlights the returns of these sectors along with the broader market index.

Given the omnipresence of these sectors, we also maintain smallcases which help investors track these sectors. You can check them out here.

Conclusion: The Road Ahead

The Indian government’s unwavering commitment to economic growth through strategic investments has ushered in a new era for sectors that were once struggling to find their footing. The energy sector, real estate, and infrastructure development have experienced a renaissance, contributing not only to economic growth but also to the vibrancy of the stock markets.

As India continues on its trajectory of economic recovery, the symbiotic relationship between high capex and stock market performance becomes increasingly apparent. Investors are now closely watching government policies and capital expenditure plans, recognizing the transformative impact they can have on sectors that were previously dormant. In this synergy between policy initiatives and market dynamics, lies the promise of sustained economic growth and a buoyant stock market.

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The content in these posts/articles is for informational and educational purposes only and should not be construed as professional financial advice and nor to be construed as an offer to buy /sell or the solicitation of an offer to buy/sell any security or financial products.Users must make their own investment decisions based on their specific investment objective and financial position and using such independent advisors as they believe necessary.
Windmill Capital Team: Windmill Capital Private Limited is a SEBI registered research analyst (Regn. No. INH200007645) based in Bengaluru at No 51 Le Parc Richmonde, Richmond Road, Shanthala Nagar, Bangalore, Karnataka – 560025 creating Thematic & Quantamental curated stock/ETF portfolios. Data analysis is the heart and soul behind our portfolio construction & with 50+ offerings, we have something for everyone. CIN of the company is U74999KA2020PTC132398. For more information and disclosures, visit our disclosures page here.

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smallcase in focus | February, 2024
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