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Budget FY22: Well-laid plans, execution is the key

Government has clearly signalled its intent to accelerate infrastructure development and thereby, crank up the economic growth. Despite lockdown and pandemic challenges, FY21RE capex outlay has been marginally increased to Rs4.4trn, implying strong Q4FY21E for capital goods companies. Overall capex allocation for FY21BE is Rs5.5trn, driven by roads (up 17%), metro (up 193%), renewables (up 16%), central multi-lateral projects (up 43% YoY) and state multi-lateral projects (up 90% YoY). The push towards distribution sector reforms will step up the demand for low and medium voltage switchgear, smart meters etc. Water, sanitation and railways have also witnessed generous increase in outlay; we believe execution of this will propel growth. Given the substantial increase in capex outlay we raise earnings and upgrade L&T to BUY from ADD with revised target price of Rs1,684 from Rs1,457 earlier and maintain BUY on Cummins with a revised target price of Rs838 from Rs783. Our top picks: Larsen & Toubro, Cummins, KEC and Kalpataru.

* Focus on infrastructure investments continue: There is a marginal increase in FY21RE despite the challenging environment. FY22BE capex outlay is at a record high of Rs5.5trn. Significant growth in allocation is witnessed under roads (up 17%), metro (up 193 YoY), railways (up 33% YoY), renewables (up 16%YoY) and central assistance in multilateral projects increased by 43% YoY in FY21BE. The impetus towards distribution modernisation with a five-year cumulative outlay of Rs3trn will further fuel demand for products and solutions in that segment.

* Renewables, hydrogen energy and distribution reforms to fuel growth: The government has walked the talk in terms of focus towards renewables, distribution reforms and tapping new age hydrogen market. The outlay of Rs3trn over 5 years towards distribution reform will drive growth for smart meters, substation automation and low voltage switchgears.

* Clear push towards multi-lateral funded projects: The central assistance towards external aided projects has witnessed an increase of 36% to Rs239bn in FY21RE vs FY21BE. This allocation grows 43% to Rs343bn in FY22BE driven by dedicated freight corridor, Bangalore metro, Kudankulam nuclear plant unit 3, Bihar national highway, Chennai & Mumbai metro, Meerut-Delhi rapid transit system and high-speed Mumbai – Ahmedabad rail etc. In state external aided project, FY21RE is revised 75% to Rs257bn while FY22BE is increased 90% to Rs489bn.

* Water and sanitation witness generous allocation: Water supply and sanitation outlay increased to Rs191bn in FY22BE vs Rs11.9bn in FY21RE. This will fuel demand for related products and turnkey solutions for the same.

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