capex cycle: How to ride the capex trend for mega profits in stocks

Over the past two years, private sector and government capital spending has been subdued due to the pandemic and lockdowns.

This shall be changed now. RBI also expects the capacity expansion cycle (Capex) to pick up again. Recently, we’ve seen major investment announcements across industries. Private investment is now booming as demand revives.

First, let’s understand how an investment cycle will favor investors

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As shown above, when demand for a product increases, firms cannot meet supply. This leads to companies increasing their capacities in order to expand production. Increased supply then leads to higher sales, which in turn creates value for its shareholders.

In the short term, a company could see margins squeezed due to investments in physical capital expenditures. The same starts to relax once a company starts production in new factories. This makes this company value an added value for its shareholders in the medium to long term.

The Indian cpaex cycle is currently being driven by several reasons. First, the global focus has shifted from China to India for their manufacturing needs. This was favorable for domestic companies.

As the world eyes India for its next order, domestic companies are ramping up production and investment to meet global supply.

In FY23 budget, the government increased capital spending by 35.4% to Rs.750 crore in 2022-23 from the previous Rs.554 crore. That is 2.9% of GDP. This measure was taken to support the development, which requires heavy investments.

More companies are qualifying for the government’s product-linked incentive for domestic manufacturing. It varies in fields from electronics to defense to electric vehicles.

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Deleveraging corporate balance sheets coupled with healthy profits are key growth drivers for an increase in capital spending. Auto, consumer discretionary and infrastructure are among the sectors that have announced major expansions. Since this is the beginning of the cycle, it’s the right time to invest in these companies.

An investor needs to stay alert and analyze where the company is investing. An important question to ask yourself is whether the company is earning progressively higher returns on capital investments. If so, then you have a stock that can be a great compounder.

Technical Outlook

After three weeks of consolidation, the benchmark index has seen a range break and prices are trading above its 21-day exponential moving average which stands at 17,320.

The overall range for Nifty is still showing a sideways trend on the broader time frame as prices have been trading in a range of 16,800 to 17,900 for the last 2+ months.

The momentum oscillator RSI (14) is hovering near the 50 level, indicating a flat trend with no jitters.

Immediate support for the NIFTY comes in at 17,330 and below the 17,250 level. The resistance for the NIFTY is 17,800 levels followed by 17,900 levels.

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expectations for the week

Global investors will be closely watching China’s GDP figures, which are due to be released early next week. The set of economic indicators also includes industrial production, quarterly retail sales and monthly unemployment rates. In addition, market participants will observe the QoQ Advance data of US GDP growth rate.

At home, INR/USD moves are being closely watched as the Indian rupee depreciated to record lows. Additionally, quarterly results will drive market sentiment as they pick up pace. Any insights from management that would assist in predicting future earnings prospects would be greatly appreciated by D-Street.

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