India’s CapEx cycle: key opportunities in infrastructure, capital goods, and power

India’s economy is embarking on a strong capital expenditure (CapEx) cycle due to strong government-led initiatives, private investments, and changes in global supply chains. An allocation of ₹12.2 lakh crore has been designated for infrastructure in the Union Budget for 2026-27, representing an increase of ₹0.9 lakh crore compared to the previous year. This CapEx cycle offers the potential for several years of growth in key sectors.

Infrastructure: the backbone of growth

According to RBI estimates, India’s infrastructure spending has risen from ₹3.5 lakh crore in FY21 to a projected ₹12.2 lakh crore in FY26. Initiatives like PM Gati Shakti, Bharatmala (for highways), and Sagarmala (for ports) are drawing private sector capital expenditure in the country. The National Highways Authority of India aims to build 50,000 km of roads by 2027, and the UDAN scheme is increasing the number of airports to 220.

This is a good scenario for EPC majors. Amongst these, Larsen & Toubro (L&T) is in the lead with an order book of ₹4.5 lakh crore, with 30% coming from infra spend. IRB Infrastructure and KNR Constructions have 20-25% CAGR upside with good order inflows and 15-18% EBITDA margin. Risks involved: Delays in execution due to monsoon conditions. However, an increase in BOT orders will reduce this risk.

Capital goods: engines of industrial revival

The CapEx cycle in the manufacturing and machinery space is also seeing a revival, with PLI schemes injecting ₹2 lakh crore in 14 sectors. Capacity utilisation in core industries has also gone up to 78% in Q4 FY25, as per CMIE. Siemens India in the electrical equipment space and Thermax in the boilers and turbines space are seeing a growth of 25% YoY. BHEL and Cummins India are also seeing growth due to the defence and railway modernisation space. Cummins India is seeing a game-changer in the ₹2.5 lakh crore Indian Railways plan to modernise the railways over the next decade. We are able to see a revenue growth of 18-22% in this space, with a high ROE of more than 20% for market leaders. We also have to look at exports, as India can play the China+1 game.

Power: the energy transition

India's power sector needs ₹40 lakh crore capex to achieve 500 GW non-fossil capacity by 2030. This statement is based on CEA reports. In the power sector, thermal capacity additions (50 GW) coexist with renewable capacity additions (300 GW solar/wind) and nuclear capacity additions through Small Modular Reactors. In the renewable space, NTPC Green Energy and Adani Green Energy are leaders, with a pipeline of 50 GW. In the thermal/power space, JSW Energy and Tata Power stand out, utilising hydro and pump storage. NTPC's 15% capex increase to ₹3.5 lakh crore puts it in a strong position. Nuclear plays like BARC-related companies benefit from the 22 GW target. Margins may rise by 200-300 basis points due to economies of scale.

Conclusion

This round of CapEx, which should add 10-12% to India's GDP by FY28 (Motilal Oswal), has sectoral returns of 15-20%. Play on companies with sound balance sheets (D/E < 0.5) and 20%+ order book growth.

What are the risks? Well, for starters, high valuation levels, as infrastructure stocks are at a high PE of 25. Then, of course, there are high levels of interest rate risk, with the RBI repo rate at 6.25%. Fiscal slippages are also a problem, though the geopolitical scenario may also play spoilsport, given India's dependence on imports.