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Investors are positive on the multi-year capex cycle, with sectors like renewables, transmission, railways, defense, and PLI driving a major part of capex growth.

Private sector capex bottomed out in FY21, but all eyes are on the broad-based recovery in large private sectors, as government capex cannot continue to grow at the same high pace of >35% CAGR as seen over the last two years.

FIIs pumped in more than INR433b into the capital goods sector in CY23, nearly six times higher than that in CY22. DIIs have also increased their allocation toward the sector in Dec’23.

Genset players indicate demand being fairly strong across key segments and that players are ready for the emission shift.

Demand may see minor disruption during election months; however, underlying long-term growth drivers remain intact even after minor disruption.

Additionally, Genset industry players indicate that domestic demand momentum remains strong across low-to-mid kVA ranges, driven by strong activity across manufacturing, hospitality, residential, and commercial construction, some part of demand momentum is also contributed by pre-buying in low-to-mid kVA range ahead of the norm implementation, particularly from residential and commercial segments.Low-to-mid kVA range forms nearly 70-75% of the overall genset market, HHP range forms the remaining market, and data centres remain a key growth driver for HHP genset, which is growing at a faster rate than low- to midrange gen-sets, Currently CPCB 2 products contribute to nearly 80% of the genset sales and the remaining comes from CPCB 4+, particularly from NCR.Inventory levels for CPCB 2 will start coming down from Apr’24 onward as production will then shift to CPCB 4+ ahead of the implementation timeline in Jul’24, most government contracts are already mandating the usage of gensets based on the latest norms.

The volume market shares of KOEL, Cummins have increased in the past few years, thereby negating the possibility of aggressive competition to gain market share. These three players form nearly 70% of the volume in the market.

Thirdly, strong demand may continue to support higher pricing, unlike the last transition when demand was weak.

Moreover, Genset market will remain mixed over the next few months owing to several events such as election impact, transition to new norms, and expected private capex recovery in select sectors.

Key factors to watch out for in the coming quarters are the impact of election-related disruption in genset demand during May-Jun’24, the implementation of CPCB 4+ norms in Jul’24 and the demand shift from higher nodes of CPCB 4+ (700-750 kVA) to cheaper nodes of CPCB 2 in higher kVA categories such as 800-1000 kVA, price stabilization in the next one year as operating leverage kicks in.

Sector valuations are already high in anticipation of the continuation of the capex cycle as the sector’s total addressable market (TAM) is expanding.

Sustainability of these multiples depends on companies’ ability to deliver on expected parameters, capex trends, and cost control. We prefer companies that can improve their TAM and market share.

We do believe that amid high valuations, most companies will see earnings-led growth and further re-rating would be driven by 1) better-than-expected growth in government capex over the next five years, 2) faster and broader revival of private sector capex, and 3) faster recovery in exports.

Triveni Turbine: Target Rs 570

We believe that Triveni is ideally positioned to capture growth in the turbine market, both domestically and internationally. The company will continue to focus on increasing its share of exports and the aftermarket, while also concentrating on maintaining strong margins.

We expect a PAT CAGR of 32% over FY23- 26. Backed by a comfortable negative working capital cycle, strong margins, and low capex requirements, we expect its OCF and FCF to report a CAGR of 40% and 47% over the same period, respectively.

L&T: Target Rs 4200

With anticipation of 10-12% CAGR in govt. capex over the long term & large-scale recovery expected to see in the pvt. capex, we still expect LT to grow at a faster rate.

We expect revenue/PAT CAGR of 18%/26% over FY23-26 for core EPC division driven by 18% growth in order inflows, gradual recovery in core EPC EBITDA margin to 9.7% by FY26 & control over working capital.

(The author is Head – Retail Research, Motilal Oswal Financial Services Limited)

(Disclaimer: Recommendations, suggestions, views and opinions given by experts are their own. These do not represent the views of the Economic Times)

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