Interim Budget 2024: Jefferies expects railways, defence shares to stay subdued. Here's why

Foreign brokerage Jefferies in its India Strategy 2024 note expected only about 7-8 per cent growth in the government capex budget for FY25 in the forthcoming interim Budget.  This low number, the broking firm said, might disappoint the market, adding that stocks exposed to the government capex program may see some correction.

“That's the reason why we have lowered Larsen & Toubro Ltd ’s weight in our model portfolio to neutral and transferred the same to Adani Ports. Some stocks exposed to railways and defence capex program may also be subdued," Jefferies said.

Besides, Jefferies said the pressure to raise welfare spending amid a consolidating fiscal would imply a search for revenues. While it does not expect an immediate tax hike, considering elections, some post election measures such as higher capital gains tax are possible during the year.

"Disinvestment may also get ramped up post elections, partly as the government capitalises on the sharp run in PSU stocks in sectors such as railways and defence," it said.

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That said, Jefferies does not believe that this will derail the whole capex cycle, as 75 per cent of the capex in the economy is housing and private corporate related which "has a multi-year upside ahead."

Jefferies said the housing upcycle is in the third year of upcycle and that it should still have five-plus years to go. For the corporate segment, Jefferies said the overall capacity utilisation is near 12-year high with examples being cement and  power. Even if the government's infra capex spends cool off under budgetary pressure in 2024, it believes the large housing and corporate spending will drive the capex levels higher.

Any potential correction in capex plays post budget would then become a good buying opportunity, Jefferies said.

"The recent upturns in corporate spending & housing cycle have five-plus years to go; and at 75 per cent of capex, are its major drivers. Any potential dip in capex plays on declining confidence in govt. capex would then especially be a buying opportunity. L&T, SBI, Lodha, Godrej Properties, Ultratech Cement, Thermax, Polycab, KEI, Kajaria, JSW Energy, Coal are the preferred capex cycle plays," the brokerage said.

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