The Next Bull Market Will Be Led By... 

In today's video, I'm going to talk about a theme that could potentially trigger a bull run in the markets, and about the companies that stand to benefit from the same.

I'm speaking of the long awaited capex cycle.

To understand what it could mean for stock markets, let's revisit history.

India witnessed a solid capex upcycle in 2003-2007. During this phase, the Sensex was up 7 times. The smallcap index was up 16 times.

We could be in the initial phases of the similar capex upcycle, that could lay the foundation of next bull run.

If you go by the commentary of bank managements, the green shoots are already here.

There is a guidance of corporate credit growth. %. The investment activity is gaining momentum.

From a broader environment perspective, there are policy tailwinds.

in this year's Budget, the government hiked its capex target by 35% to Rs 7.5 trillion. The PLI schemes have been set in motion. This alone could have huge multiplier effect for private capex.

Then there are structural tailwinds.The global companies are looking for outsourcing beyond China. If India is at the receiving end of even a fraction of the demand, it could be a huge incremental growth over our existing base. Capitalizing this opportunity will require investment in capacities.

From a bottom up perspective, the corporate balance sheets are cleaner with debt to equity ratio looking better. The operating cash flows are higher. The banks have a cleaner balance sheets and are geared up to lend more. The capacity utilisations of corporates are up from 68% to 74%.

The sectors at the forefront of this capex revival include infra plays -, road, rail , port in, cement , logistics , oil and gas , renewables, power sector and other corporate sectors such as auto, pharma, chemicals, and textiles and so on.

However, if you really intend to participate in this theme, you need to look deeper. I particularly am interested in pick and shovel plays.

So what do I mean by pick and shovel strategy when it comes to playing capex theme?

Well, this is a strategy that focuses on underlying enablers of capex revival - companies that produce goods and services that enable or ride on this capex, without needing to incur capex or huge investment themselves. It is a way to invest in an theme without having to endure the risks that may come along with it.

Let me explain this through an example.

Consider the case of paints sector.

A few weeks ago, Grasim announced an aggressive capex plan in the paints sector. It increased planned capex from Rs 50 bn to Rs 100 bn. The capacity it's aiming for is 1.33 bn litres. This is very close to market leader Asian Paints.

It's not hard to imagine what this might do to existing players. Increased supplies are likely to increase competition and pricing pressure.

No wonder then major incumbents, including behemoths like Asian Paints and Berger Paints, witnessed a sharp sell off.

This is going to be a common issue in some other sectors as well.

So the huge capex planned in a particular sector could turn out either way for the stocks in the sector. It will depend on the supply demand dynamics.

So, to be on the right side of this capex bet, I would be focusing on companies that are suppliers to the entire industry and not to one specific company .

Let us now move on to some sectors and companies that I believe will indirectly participate in this theme. But I have a disclaimer here. While these businesses are likely to benefit from the capex revival, inclusion in this list does not imply a Buy or sell view. This video does not cover a complete analysis of the companies or margin of safety in valuations. For that, viewers should dig deeper and do more research.

The first is Sanghvi Movers. It is the largest crane hiring company in India and Asia, and offers cranes on rent to private companies and PSUs. The sectors it caters to are diverse , including renewables, power, refinery and gas, steel and metal, cement among others, all of which are expected to participate in the capex theme. The company's order book to be executed in FY23 itself has witnessed an increase of 93% YoY. Its debt-to-equity ratio is benign at 0.2 times, at 5 year lows.

The second on this list is not any specific company, but a sector . I'm speaking of Rating agencies. To fund the private capex, corporates will need to raise debts. And this is likely to raise demand for specific project ratings required to avail bank credit. Listed players in this sector include CRISIL, ICRA, and Care.

The third on this list is RITES. RITES is a PSU that earns majority of its income from the business of consultancy services for transport and infrastructure sector including for highways, airports, ports, ropeways, urban transport and waterways both in India and abroad.

The company's order book at the end of FY22 offers visibility for two years. The debt to equity ratio is negligible, and cash conversion cycle is negative.

Typically, infrastructure consulting market is assumed at around 1% of the total infrastructure investments. RITES, being a preferred government choice stands to benefit from the capex revival, with its asset light business model.

With this, I have come to the end of the video. Hope you find this useful. Do let me know through your comments and likes if you do. For more such video alerts, subscriber to Equitymaster Youtube channel.