If we are in a prolonged period of high growth in a band, how does capital goods space actually pan out because we have not seen a strong capital goods cycle for a very long time? How does it appear to be starting off?
Renu Baid Pugalia: If you look at the capex cycle, there are two legs of it. One, how is the private sector investment panning and also how is the government sector investment panning?

In the private sector, most of the light manufacturing sectors have done well in terms of investments and now, some of the core and the heavy sector investments are also starting to look up, specifically in the steel and the minerals and metal segment. So, to that extent, the private corporate capex is clearly looking up. When we compare it to the previous cycle, the missing link was largely coming in from the power segment.

At the same time, the long lead cycles made the investments far more lumpier and large in terms of the mix of capex. But ex of power, if we see even the current environment, clearly the capex cycle has been on an up move for the last two years.

If you look at the government side, while some of the sectors like road, etc, have been soft, investments in railways have been very strong and infrastructure like water has been strong. So, I think the biggest missing link, when we look at aggregate data, was the power sector because in terms of overall number, this sector used to contribute nearly over a third in terms of the overall capex number if you look at the long-term trends and this sector was completely missing over the last decade or so.

Given the kind of power crisis that we are into, our government has been very tight in terms of bringing back thermal power and resolving various issues which were linked to renewables and evacuation of power. So, incrementally, over the next 12-18 months, we will see towards FY25 second half and FY26, aggregate numbers will tend to improve, also driven by the investment and the actual capex coming in from the power sector. Within power, we think, while generation has multiple legs T&D from a capital good perspective will look far more promising because the supply chain, the vendors are more prepared today compared to thermal. In thermal, over the last decade, the entire supply chain has been completely distorted and it will take a couple of years for the industry to get back on its feet.I want to talk about specifics now. What are your three top ideas to play what you just explained? . Also, what are your thoughts on valuations?
Renu Baid Pugalia: Overall, if you look at the capital goods sector, our top three picks in the current level looking at valuation, etc, has clearly been Cummins, Bharat Electronics, followed by Larsen & Toubro. We like L&T, but we think both in terms of valuations and the incremental drivers in terms of order flows, execution will take a bit of a backseat during the election year.

But the long-term growth prospects look good. On the valuation front, the overall sector has re-rated very sharply. It has now been almost 18 to 20 months that the re-rating has been intact. But given the relative risk-reward and the opportunities for earnings upside or earnings upgrade that we see, the visibility, I think Cummins still provides incrementally good visibility if demand remains intact for short-cycle products and the levers here are all diverse right from manufacturing, construction, infra, to the power sector or the core sectors which require electricity where there will be very clearly shortages visible in the next two years, along with data centres and other markets.

Exports will also be a very clearly visible driver in the next two years, especially for energy sector related demand coming in from the US and the European markets. We like Cummins’ valuations compared to the rest of the peers and still look in the comfortable zone while they themselves have re-rated by almost 30% in the last year or so, but still better off.

On the other hand, if you look at names like Bharat Electronics, again, a pure play defence with high quality visibility on order flows, a proven track record in terms of project management and execution of large system orders and more importantly the balance sheet quality is very strong. So, the kind of certainty of earnings which is there in Bharat Electronics is far superior at this point in time compared to some of the other defence PSUs.

In that backdrop of the India-China border tension, I think defence will continue to remain one of the key structural themes in this space. Unfortunately, if you look at the power value chain, there are no really clear proxies, high-quality growth proxies with strong fundamentals at this point in time on the generation side if you look at the cap goods. Utilities, yes, one can look at generation and transmission utilities like NTPC, Power Grid, and others.