How to play a new capex cycle in the economy?
The Indian economy has shown strong resilience against the Covid pandemic and the support from the government and the central bank has been unparalleled. There has been visible signa of recovery in growth and demand.However, India is yet to see a cyclical economic recovery . Accordingly, the domestic market has climbed to record levels, even as it grappled with the worst of the health crisis. It seems investors have continued to believe in Indias growth story. Actually, the reflation story, and specifically about recovery in commodity prices, have broadened the outlook or the economy.We have just seen a strong leg of rise in commodity prices across the world, which has also benefited Indian commodity companies. These companies have seen fantastic improvement in profits, and are using their cash flows to deleverage balance sheets. Some of them are also looking to expand further.As the economic recovery picks up across the globe, the capex story in commodities, metals and cement in particular, has taken roots. There has also been a gradual pickup in urban real estate, with the second wave abating and some states announcing relaxation in stamp duties.Besides, steel and cement companies find themselves in the cusp of a much-awaited capex cycle , with the government focusing on infrastructure spending, including investment on roads, railways, ports, and low-cost housing. That government is expected to continue the rollout reforms to push manufacturing, FDI, break government monopolies and improve funding visibility. It is also expected that the government will continue trimming subsidies to pave the way for more infrastructure capex going forward. Besides, favourable factors such as low interest rate, availability of sufficient capital in the system and robust global demand are also aiding capex across industries.Many Indian companies are now poised for capex growth as the balance sheet stands deleveraged. Now companies are in a position to undertake significant capital expenditure over the next a few years.With interest rates staying low, there is foreseeable demand on the horizon. Undoubtedly, India is in the cusp of its biggest and longest growth stories. The economy is sitting on one of the highest capex cycles that the country has ever seen. It could be seen that from steel and cement to consumer electronics and electric vehicles, Indian companies have drawn up extensive capital expenditure plans for this fiscal year. As there plants are running at near-full capacities and they expect the pace of economic activity to pick up. As we are enter the early stages of a 2-3 year capex uptick, this is a very good opportunity to pick up companies from the commodity side, cyclicals, industrial products or auto ancillaries. (DK Aggarwal is the CMD of SMC Investment and Advisors)