Infrastructure stocks are expected to outperform capital goods stocks in the near future due to their strong valuations and robust growth prospects. While both sectors have seen impressive growth over the past three years, the capital goods sector has seen greater growth due to lower capital requirements and a faster cash conversion cycle. The sector benefits from high earnings growth and strong balance sheets, which contribute to strong operating results and high valuations.
Performance Comparison
Over the past three years, capital goods stocks have soared, tripling in value while infrastructure stocks have doubled. The recent success of the capital goods sector is attributable to its ability to achieve higher returns with lower capital requirements compared to infrastructure companies. Capital goods companies have faster cash flows due to shorter inventories and production cycles, and they are also timely in disbursing funds, typically within 2-4 months. This efficiency has led to higher utilization rates, which has significantly improved revenues and further boosted investor confidence.
Index 1-year return (%) 3-year return (%) 3-year CAGR (%)
Nifty Infrastructure 60 100 26
BSE India Infrastructure 110 156 37
BSE Capital Goods 80 208 46
BSE Sensex 22 46 13
NSE Nifty 25 48 14
Key Infrastructure Growth Drivers
The future of the infrastructure sector looks promising owing to several positive factors. Road construction completion rate increased by 20% per day in FY24 and the National Highways Authority of India (NHAI) has significantly increased its budgetary allocation to Rs 2.78 trillion for FY25. This increase is expected to boost order intake for companies and spur further growth. Moreover, India’s Gross Fixed Capital Formation (GFCF) reached 33.5% of GDP, the highest in the last 11 years, indicating robust investments in the sector.
The newly elected government has placed emphasis on infrastructure development, with its 100-day plan including the ordering of 3,000 km of highway projects. The plan underlines the government’s commitment to infrastructure growth, backed by a planned Rs 1 trillion investment in new rail rolling stock and large-scale modernisation projects.
Evaluation Insights
On the valuation front, the BSE Infrastructure index is trading at a one-year forward price-to-earnings (P/E) ratio of 18x, which is a premium but in line with the overall national valuation. The Nifty Infrastructure index also reflects similar valuations. Given the strong growth potential and earnings outlook for the sector, these premium valuations are justified and are likely to be sustained over the next few years.
In contrast, the Industrials sector is currently trading at a much higher valuation, at a one-year forward P/E of 40. Despite this premium valuation, the sector’s optimistic outlook and robust earnings growth forecasts suggest it will continue to attract investor interest.
Sector Outlook
Prospects for infrastructure companies, especially in the engineering, procurement and construction (EPC) sector, remain positive. Road construction, railway expansion, cement production and affordable housing are expected to be the major growth drivers. Government capital expenditure remains robust with 85% of FY24 budget already disbursed and mega projects such as modernisation of 40,000 railway bogies and construction of 30 million houses under the Pradhan Mantri Awas Yojana (PMAY) are expected to have a significant multiplier effect.
The Capital Goods sector has a comfortable average backlog-to-sales ratio of 2x and is expected to grow sales at an average of 18% and earnings per share (EPS) at an average of 24% per year from FY24 to FY26. The sector faces challenges including potential margin compression due to rising raw material costs, but projected high volume growth is expected to maintain healthy operating margins.
Infrastructure stocks are well positioned for future gains, with robust growth prospects and relatively lower valuations compared to capital goods stocks. Given the current market trends and strong policy support for infrastructure development in India, investors may find infrastructure stocks more attractive.
