Corporates joining capex upcycle, says ICICI Securities. Here are its top picks

Corporates have started to contribute to the capex upcycle, as per ICICI Securities

The post-pandemic economic recovery was largely driven by household investments in real estate and the government push towards infrastructure, but now corporates have started to contribute to the capex upcycle, as per ICICI Securities.

In a report, the brokerage also said that state governments’ capex, which remained a laggard in FY23, is expected to pick pace this fiscal.

“Post-pandemic economic recovery was largely driven by growth in gross fixed capital formation (GFCF), which grew 25.6 percent YoY during FY22 to reach Rs 67.9 lakh crore in nominal terms,” analysts at ICICI Securities said.

GFCF refers to the gross additions to fixed assets like machinery, equipment, buildings etc. It is a key gauge for assessing the underlying health of an economy.

GFCF growth in FY22 was largely driven by household investments into real estate and central government push towards infrastructure capex, while state governments and corporates lagged, ICICI Securities noted.

Also Read: Why India’s rising public capex is important for reducing its cost of capital

GFCF continued to grow robustly in FY23 (at 17 percent) to reach Rs 79.4 lakh crore.

But now, corporates too have started to contribute to capex upcycle as evidenced by the listed space capex growing by a robust 21 percent YoY to an all-time high of Rs 7.6 trillion in FY23.

It could reach Rs 8.5 lakh crore in FY24, assuming it keeps pace with nominal GDP growth, it added.

Besides, aggregate state governments’ capex, which remained a laggard in FY23, is expected to pick pace in FY24E to reach Rs 8.4 lakh crore, based on state budget estimates.

Cyclical Winners

Household investments in real estate were the biggest driver of GFCF in FY22, accounting for 27.2 percent of it.

“We expect the real estate upcycle to continue being driven by strong demand pan-India, rising real estate prices and the peak of the interest rate cycle behind us,” it noted.

ICICI Securities’ top picks from an investment cycle revival perspective are:

Industrials: Larsen & Toubro, NTPC, BHEL, KEC International, JSPL, Jindal Stainless, Bharti Airtel, HPCL, IGL, Greenpanel Industries, Century Ply, BEL, Gujarat Fluoro, Archean Chemicals, JK Cement

Discretionary Consumption: Interglobe Aviation, M&M, Jubilant Foodworks, Kalyan Jewellers, United Spirit, PVR Inox, Lemon Tree, Wonderla.

Credit growth: Axis Bank, SBI

ICICI Securities further said the positive drivers for the capex cycle in India currently include buoyant animal spirits in capital-intensive sectors such as energy, power, mining, infrastructure, real estate, PLI-incentivised sectors, etc, and ample availability of financial resources (internal cash generation, tax buoyancy and bank credit).

Also Read: This fund manager prefers to play capex theme through mid, small-caps. Here are his picks

Stability in commodity prices post the spike seen at the beginning of the Russia-Ukraine conflict and expectations of peak interest rates, and then further rate cuts, have also mitigated the key potential risks to the capex cycle.

However, this does not mean the coast is all clear.

Some key risks to the investment cycle include clack in the economy persisting with capacity utilisation stagnating in the 65-75 percent range, uncertainty about the impact of El Nino and a combination of rural stress, election year pushing government spending towards revenue expenditure and global recessionary headwinds crimping demand.

Sustaining Strength

The recovery in private capex has been highlighted by other analysts as well.

Morgan Stanley Research, in a recent report, said capex appears to show recovery, led by incipient signs of a pickup in private capex, along with sustained support from public and household capex.

“We closely track the CMIE’s data on projects under implementation to get a timely sense of capex recovery. Incoming data for overall projects under implementation (as compiled by the CMIE) for the quarter ending March 2023 show a pickup in projects under implementation and new investments, with improvement led by private investments. In particular, new investments by the private sector (in real terms) rose to the highest level since June 2010,” it said.

Morgan Stanley expects a confluence of cyclical and structural tailwinds to drive India’s growth momentum in the near term.

“The bull case is driven by improvement in external demand feeding into a quicker recovery in private capex with positive spillovers for consumption as well,” it noted.

However, the possibility of a weaker-than-expected trend in domestic and external demand driven by tighter domestic and/or global financial conditions would weigh on capacity utilisation and push out capex recovery, it added.