Why Siddharth Khemka is gung-ho on capex theme & Axis Bank in 2023

"In the first half, a lot of heavyweight companies carried out a lot of capex and now a lot of smaller, midsize companies are talking about how they plan to increase capacity over the next few years. Capex as a theme will do well. Also as the general elections are due in March 2024, the government agenda will be very high on infrastructure," says Siddharth Khemka, Head of Retail, Research, MOFSL.


In terms of outlook this has been a year where PSU banks have done well and capex has done well. In these two themes, what do you expect will continue?
Siddharth Khemka: Among these two, we think the capex theme should do well in 2023. The theme has just picked up. While we expect the PSUs to continue to do well, they have moved a lot and the risk reward at the current juncture may not be that favourable. Plus, they are a volatile lot. If you look at the capex theme, the government spending has been consistently on the higher side.

Even in the last Budget, we saw the government increasing the overall capex as a percentage to the overall spending as a percentage of GDP. Capex spending was on the higher side at above 7%. Now we are seeing a lot of green shoots in terms of the private capex cycle as well. A lot of corporates have already announced capacity expansion plans.

In the first half, we have seen a lot of heavyweight companies doing a lot of capex and now a lot of smaller, midsize companies are talking about how they plan to increase capacity over the next few years. Capex as a theme will do well. Another factor is that with the general elections due in March 2024, the government will have the last full year to show their activity and we have seen the Indian government’s agenda is very high on infrastructure.

The same model worked for them in Gujarat state elections as well. So, the focus will be on increasing capex, increasing the infrastructure spending and getting a lot of projects on stream before the elections. That as a whole should do well in 2023.

Just wanted to deep dive into a couple of these names; Indian Hotels as well as ITC. What is the thought process behind these?
If you look within the consumption space, the volatility has been very high in terms of the commodity prices although towards the end of the year, we saw commodity prices softening. Rural demand has not yet picked up and within the overall consumption space at least on the consumer discretionary space and the FMCG space, we believe ITC is well placed with low raw material impact and a steady growth in the core business that is the cigarette business.

Plus if you see some of the other segments, the agri business, the paper segment as well as the hotel segment, they have started doing very well and the contribution from them to the overall profitability is improving. We believe that the overall business mix for ITC is pretty strong in the entire consumption space and that as a theme should do well in 2023.

If you talk about the other theme, we are seeing that after almost 10 years, in the hospitality space, the cycle has turned favourable and demand is on a rise while the supply has been subdued. That has helped hotel companies to improve occupancy, average room rates and that has led to improving profitability.

That is a cycle that we expect to continue. There could be small roadblocks if the current situation around Covid expands or increases but we expect that to provide opportunity for long- term investors to enter into a space where we see a strong upcycle for the next three, four years. That makes us positive on the hotel space as a whole.

We look at the list of various stocks that you have. There is L&T. You mentioned capex. You mentioned defence but L&T also has a substantial business from IT. How would you look at it?
L&T is becoming more of a holding company so to say and some of their IT businesses – L&T and MindTree combined now have become a large entity where we have a very positive view. Given the combined size, they will be eligible for a lot of these large deal wins. The near-term headwinds for the overall IT could be there because of the slowdown expected in the US and Europe but if you look at the longer term picture, that very positive synergies could come around with the merger of these two players.

On the other side, LTTS is in more of a product development, ERD space which has been doing well and that is the space that should continue to do well.

In the core business, following the capex theme, we are expecting a lot of improvement in execution in 2023. Order wins have been pretty strong. Defence as a theme has already picked up and L&T is a strong player there. Overall, if you put all these pieces together and want to play the capex theme in India, there is no alternative to L&T. That is the proxy to the infra, capex theme in India.

What is your rationale behind picking up Axis Bank? It is one of the top bets when it comes to the financial sector because one is spoilt for choice there. IndusInd Bank is a consensus buy now and a re-rating candidate. ICICI Bank has been doing well plus there is a possibility of HDFC underperformance reversing in 2023. What makes you confident about Axis Bank?
Our core theme for 2023 is credit growth. That is the common theme for a lot of players in the market but that is something that we have been positive on and we are already seeing that the system credit growth is coming at almost a decadal high.

Within that space, we have been positive on ICICI Bank and SBI for a long time now. SBI is also in our list of top preferred picks for 2023. But coming to Axis Bank, we feel that the valuations are comfortable, the room for upside is higher and better in Axis compared to say an ICICI which is also in our preferred list but because of the lower valuation, we see room for further upside.

We have seen that Axis Bank is witnessing strong growth in the retail and mid-corporate segment along with MSMEs which should be the key growth driver for Axis. Yes IndusInd is also there but there are certain other segments pockets where they could be. So there is vehicle financing and micro financing which is a bigger portion for IndusInd compared to the mid-corporates and MSMEs is a segment where there could be strong growth which should drive Axis Bank in 2023.