Cyclicals poised for growth amid capex revival; defensives face challenges, says ICICI Securities

In the commodity sector, the negative impact on the PAT-to-GDP ratio in CY24 is projected to reverse by CY25, driving the ratio to 5.3%

ICICI Securities has adopted an overweight stance on cyclicals by CY25, following a temporary slowdown caused by the election-driven deceleration in CY24 and an underweight position on defensives.

Capex-driven sectors such as infrastructure, manufacturing, commodities, and utilities are poised to benefit significantly from a revival in investment demand by CY25, with recovery evident in commodities like cement, metals, oil, and refining margins. Beyond traditional sectors, the capex cycle is expected to gain momentum from emerging areas like data centres, AI infrastructure, EVs, EMS manufacturing, and green energy, ICICI Securities said.

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The report said the re-leveraging cycle, critical for a capex-led GDP upswing, appears imminent, with large banks well-positioned to generate alpha due to attractive valuations. Financial services, including capital market players, are likely to benefit from this trend. Meanwhile, affluent households are expected to sustain structural growth in discretionary spending across auto, retail, leisure, travel, property, gaming, entertainment, and internet sectors.

"Structural growth in high-end discretionary spending remains intact. On the external front, global trade dynamics might face headwinds as policies associated with Donald Trump come into effect. Despite the election-related slowdown, corporate capital expenditure continues to expand, showing early signs of a re-leveraging cycle, particularly among mid and small-sized firms", ICICI Securities said. "In the commodity sector, the negative impact on the PAT-to-GDP ratio in CY24 is projected to reverse by CY25, driving the ratio to 5.3%. Additionally, return on equity (RoE) is expected to remain strong, exceeding the 15% threshold indicative of sustained value creation", it added.

In contrast, defensives face valuation pressures and growth challenges. Election-related consumption spending is expected to taper in CY25, creating a high base effect and weighing on broad-based consumption. While higher agricultural output offers a positive offset, rural wage growth lagging rural CPI inflation and evidence of slowing urban mass consumption remain concerns. Export growth, particularly in IT services, could face headwinds due to slowing developed markets and the impact of Trump-era tariff policies on global trade, though India may benefit from redirected demand amid sanctions on China, it added.

ICICI Securities projects a fair value for Indian equities with a 5% earnings yield, equating to a forward P/E of 20x and setting a NIFTY50 target of 26,300 by the end of CY25, indicating a 7% upside. Their top stock picks span various economic activities. In services, consumption (primarily discretionary), and healthcare, key recommendations include Bharti Airtel, Indigo, ITC, M&M, Infosys, Kajaria, Signature Global, Lemon Tree, Aurobindo Pharma, and Piramal Pharma. Within industrials, preferred choices are L&T, BHEL, Tata Power, NTPC, JSW Steel, JSPL, Ambuja Cements, GAIL, HPCL, Navin Fluorine, and Solar Industries. For financials, the highlighted stocks are HDFC Bank, SBI, Bajaj Finance, SBI Life, and Angel One.

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