Jefferies picks these stocks ahead of Union Budget 2025
Union Budget 2025 – Jefferies has expressed a positive outlook on the industrial sector, particularly highlighting the power and defense themes as standout areas. The top picks recommended by Jefferies include Siemens, Hindustan Aeronautics Ltd, Thermax Ltd, and Larsen & Toubro.
In its latest report on industrials, Jefferies emphasized the importance of a 10-12% year-over-year capex growth target in the upcoming Union Budget on February 1. This target is crucial for maintaining confidence in the government’s focus on capex. Jefferies remains optimistic about the industrial sector, with a specific focus on the power and defense industries. Along with its top picks, Jefferies highlighted the need for continued government support for capex.
Looking back at 2024, Jefferies noted a shift in sentiment following the election results, which initially surprised investors. However, the majority secured by the BJP in Maharashtra has helped alleviate some concerns. The upcoming budget will be a key factor in determining the government’s commitment to capex.
Regarding specific companies, Jefferies pointed out potential triggers for growth. Siemens is expected to benefit from revenue and margin recovery in its Power T&D division, as well as from increased visibility in spending. Thermax’s focus on clean energy is seen as a positive transition for the company. Hindustan Aeronautics Ltd (HAL) has a promising 5-year growth outlook, driven by indigenization efforts.
Larsen & Toubro (L&T) is viewed as having low investor expectations, which could lead to stock upside if the company delivers on its guidance. Jefferies remains optimistic about the potential for growth in these companies and the industrial sector as a whole.
Our forecasted defense spending compound annual growth rate (CAGR) for fiscal years 2024-2030 is expected to be between 7-8 percent, which is consistent with trends observed over the past decade. The key drivers of our earnings in the defense sector are tied to a focus on domestic manufacturing, reducing reliance on imports, and increasing exports in response to a significant increase in defense spending. The estimated domestic defense market opportunity over the next 5-6 years is projected to be between $100-120 billion, with current policies remaining largely unchanged, resulting in a visible 13 percent industry CAGR from fiscal years 2024-2030.
If the focus on increasing exports materializes, domestic companies could see a growth rate of 15 percent CAGR, according to Jefferies. In the power sector, Jefferies identifies Siemens, Thermax, and KEI Industries as promising investment opportunities.
With a 7 percent year-over-year growth in power demand and significant under-investment in the past decade leading to peak power deficits, an estimated $280 billion is expected to be spent on power infrastructure from fiscal years 2024-2030. The transmission bid pipeline has tripled in the last two years, with Siemens and KEI expected to benefit from increased orders. Thermax is also positioned well to capitalize on the demand for captive power solutions.
Jefferies anticipates a 13 percent CAGR in infrastructure and industrial capital expenditures from fiscal years 2024-2027, compared to 6 percent in the previous decade. Following the Maharashtra elections and improved visibility on government infrastructure spending, Jefferies has raised the target price for L&T to Rs 4,600 (from Rs 4,160), valuing the company at 18x EV/Ebitda FY27 (compared to 16x EV/Ebitda FY27E previously).
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Disclaimer: This blog post is for informational purposes only and should not be considered financial advice. Investors should conduct thorough research and consult with a qualified financial advisor before making any investment decisions.