The Biggest Theme in the Stock Market I'm Bullish on Today

Editor's note: Equitymaster's smallcap guru, Richa Agarwal, has written about the biggest theme she is bullish on in the Indian stock market today. It's a theme that can potentially create many multibagger stocks in the long term. Read on to know more...

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A fortnight ago, a cattle overrun damaged the newly launched Vande Bharat train between Ahmedabad and Mumbai.

Recently, almost one thousand passengers had to shift to Shatabdi as the Vande Bharat express, running at 100 km per hour had its wheels jammed.

The journey might have started with glitch. But it seems like there is no stopping the wheels of new revolution in India's train journeys. And the companies riding this wave.

I must say, the companies are unleashing a new era for Indian Railways and passengers.

A case in point is a public sector smallcap company we recommended in Hidden Treasure back in 2019. Subscribers can read the recommendation report here.

Now most of the PSUs are labelled as inefficient, no growth and dying companies. And that's a well-deserved reputation.

Inefficient employees and management as well as stagnant growth over decades, has meant PSUs have lagged its private peers for large periods.

But then there are always exceptions. We believe our recommendation is cut from a different cloth.

It's a leading player in the engineering and transport consultancy sector in India. This company enjoys expertise in design, engineering and consultancy services in transport infrastructure sector.

With almost no debt, a professional management, an attractive dividend yield of over 4%, and return ratios over 20%, it's a no brainer investment on India's infra revival.

Perhaps it was its PSU tag that masked all these positives and kept the stock price under pressure. But only for so long.

With the infra and capex cycle picking up, the company has reported its highest ever revenue, core operating profit, and net profit in the first quarter, with over 70% year on year growth.

The company has also pitched Vande Bharat train exports to a number of countries.

In case you have not guessed yet, I'm talking about RITES.

The RITES stock price has witnessed a spectacular 64% rise in last two to three months.

Businesses like these could indeed witness a decoupling at times when the developed economies are staring at a possible recession and China is stifling itself with lockdowns and zero Covid policies.

As I have said before, capex is my favourite investing theme this year, that could lay the foundation of next bull run, and could offer multibagger stocks.

A peek into history suggests its potential.

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

If you go by the commentary of bank managements, the green shoots are already here. There is a guidance of corporate credit growth. Investment activity is gaining momentum.

From a broader environment perspective, there are policy tailwinds. The boost from indigenisation and increase in budget allocations is already evident on India's top defense stocks.

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

From a bottom-up perspective, corporate balance sheets are cleaner with debt-to-equity ratio looking good. The operating cash flows are higher too. The banks have a cleaner balance sheets as well and are geared up to lend more.

The capacity utilisation of corporate India is up from 68% to 74%. The sectors at the forefront of this capex revival include road, rail, port in, cement, logistics, oil and gas, renewables, power sector, defense, auto, pharma, chemicals, and textiles and more.

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.

As I shared in my last editorial, one such industry is specialty chemicals.

China commands 20% share in the global speciality chemical industry worth US$ 800 bn. As global supply chains are undergoing a strategic shift to reduce dependence on China, the Indian specialty chemical industry stands to benefit.

This is not a narrative, but a trend that is already unfolding. For instance, Japan has announced incentives to companies shifting base from China to India. And many other countries are encouraging a lower reliance on China.

Even a 5% shift from China to India will unleash a US$ 8 bn opportunity for specialty chemical companies in India. Within five years, India could double its share in global chemical industry.

In short, a great opportunity is unfolding for Indian companies and stocks.

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

What do I mean by a pick and shovel strategy in playing capex theme?

Well, this is a strategy that focuses on underlying enablers of India's capex revival. These companies produce goods and services that enable capex or ride on its back without incurring huge investment themselves.

It's a way to invest in a theme without having to endure the risks that may come along with it.

Consider the case of paints sector.

A few months ago, Grasim announced an aggressive capex plan. 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 focus on companies that are suppliers to the entire industry and not to one specific company.

To know more about businesses that could potentially benefit from this opportunity, I recommend you watch this video:

Warm regards,


Richa Agarwal
Editor and Research Analyst, Hidden Treasure