L&T, Siemens, Thermax, KEI: Election sound bites to keep industrial stocks higher, says Jefferies

In its 2024 outlook note on industrials, Jefferies said operating leverage surprise should continue in 2024, following the Calendar 2023 that saw earnings upgrades for most industrial companies.  The foreign brokerage said signals of government capex growth slowdown in the upcoming Budget is a potential negative but indigenisation focus and PSU/private sector driven industrial and power capex should help stocks.

Jefferies said it has 'Buy' ratings on eight of its 10 covered companies, except Cummins and BHEL. Larsen & Toubro (L&T), Siemens Ltd, Thermax Ltd and KEI Industries Ltd are its top picks. Jefferies said FY25 Budget could be partly populous, especially as the recent State elections saw even BJP matching opposition on some poll promises of income transfer policies and other welfare schemes.

Additionally, Jefferies said, the central government capex has surged by three times over the past five years already. "However, India's capex upcycle is visible across the two largest segments viz. housing and corporate capex, which contribute around 75 per cent to total capex and these should continue to contribute even if central government partly cools off," it said.

 

Jefferies said L&T has done well in the past two pre-election periods and then gone on to underperform the rest of the calendar year. Among other stocks, most have given strong absolute returns in the election year, it said. 

"We believe capex cycle uptick remains in favour of industrial stocks. Hence, though 2023 has seen strong returns, we continue to remain positive on the sector and most stocks," it said.

Jefferies said peak power deficit shortages in a 7 per cent-plus YoY power demand growth environment and underinvestment in the last decade should drive $280 billion spending in FY24E-30E (up 2.2 times). It said transmission bid pipeline is up 4 times in the last three years and that "ordering there should drive growth for Siemens (30-35 per cent of revenues) and KEI (30 per cent-plus of revenues)."

Jefferies said BHEL is a beneficiary of strong BTG equipment ordering and that it has raised its target price for thr stock sharply to reflect the strong order flow of Rs 52,900 crore-plus (up 197 per cent YoY in 9MFY24), which was 30 per cent higher than its estimates.

"However, as industry is in overcapacity, we remain concerned of profitability and hence would prefer to play the theme through other companies," it said.

"L&T is in a sweet spot, as Middle East and Domestic are both doing well and re-rating should also be driven by peak of non-core investments being behind and higher dividend/buyback prospects. Siemens should benefit from revenue and margin recovery in Power T&D division and power division demerger should create value too. Thermax should benefit from its transition into a company focused on clean energy. KEI’s power transmission exposure should help growth," it said.

 

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