Jefferies picks these stocks ahead of Union Budget 2025, shares target prices

Jefferies in its latest note on industrials said a 10-12 per cent YoY capex growth target in the forthcoming Union Budget on February 1, based on broadly maintaining capex-to-GDP ratio, is needed for the Street to maintain its confidence on government's capex-focus. The foreign brokerage said it remains constructive on industrials and, within it, power and defence sectors standout. Its top picks include Siemens Ltd, Hindustan Aeronautics Ltd (HAL), Thermax Ltd and Larsen & Toubro Ltd (L&T).

Jefferies noted that 2024 was a tale of two halves, as election results were a negative surprise with a BJP coalition coming in against a standalone majority earlier. "Order flow growth tapered off post elections and investor concerns on growth/valuations emerged. BJP’s Maharashtra election majority has allayed some concern, though budget is a decider on government capex focus continuing," it said.

Jefferies said company-specific triggers also exist as Siemens should benefit from revenue and margin recovery in Power T&D division also as visibility improves on spend in the area. Power demerger is an additional trigger, it said.

Thermax, it said, should benefit from its transition into a company focused on clean energy. In the case of HAL, the defence company has 5-year growth visibility of 20 poer cent EPS CAGR, driven by indigenisation, which should keep multiples elevated, Jefferies said.

L&T has low investor expectations built in that should lead to stock upside on guidance delivery, it said in the January 1 note.

"Our FY24-30E defence spend CAGR is 7-8 per cent and broadly in-line with the last decade. On defence, our earnings drivers are linked to domestic
manufacturing focus, import substitution and exports against a material rise in defence spend. The $100-120 billion domestic is the defence opportunity over 5-6 years with current policy just continuing vs any material change and implies visible 13 per cenrt industry CAGR in FY24-30E," it said.

Exports focus if it materialises takes the pie for domestic companies to 15 per cent CAGR, Jefferies added.

In the power space, Jefferies finds Siemens, Thermax and KEI Industries as good plays.

Peak power deficit shortages in a 7 per cent YoY power demand growth environment and under-investment in the last decade should drive $280 billion spending on power over FY24-30, it said.

"Transmission bid pipeline is up 3x in the last 2 years and ordering there should drive growth for Siemens (30-35 per cent of revenues) and KEI (30 per cent-plus of revenues). Thermax is also a good play on captive power requirements," it said.

Jefferies said believe infra and industrial capex should see 13 per cent CAGR over FY24-27 against 6 per cent in FY11-20.

"Given some improved visibility on government infra spend post Maharashtra elections, we raise our target price for L&T to Rs 4,600 against Rs 4,160) valuing it at 18x EV/Ebitda FY27 (vs 16x EV/Ebitda FY27E earlier)," Jefferies said.