ICICI Securities picks these 25 stocks that may benefit from capex cycle revival. Do you own them?

ICICI Securities has picked 25 stocks from industrials, discretionary consumption and credit growth themes that may benefit from the revival of the investment cycle in the country.

The brokerage suggested the likes of Larsen & Toubro, NTPC, BHEL, KEC International, JSPL, Jindal Stainless, Bharti Airtel, HPCL, IGL, Greenpanel Industries, Century Ply, BEL, Gujarat Fluoro, Archean Chemicals and JK Cement from the industrial space.

It has picked InterGlobe Aviation, M&M, Jubilant FoodWorks, Kalyan Jewellers, United Spirit, PVR Inox, Lemon Tree and Wonderla from the discretionary consumption space. It also believes that Axis Bank and State Bank of India (SBI) may benefit from credit growth in the country.

Post-pandemic economic recovery was largely driven by growth in gross fixed capital formation (GFCF), which grew 25.6 per cent YoY during FY22 to reach Rs 67.9 lakh crore in nominal terms. GFCF growth in FY22 was largely driven by household investments into real estate and the central government’s push towards infrastructure capex while state governments and corporates lagged in terms of capex growth.

GFCF is a measure of investment in fixed capital assets by enterprises, government and households within the domestic economy.

“GFCF continued to grow robustly in FY23 (YoY growth of 17 per cent) to reach Rs 79.4 lakh crore. Also, corporates have started to contribute to capex upcycle as evidenced by the listed space capex growing by 21 per cent YoY to Rs 7.6 lakh crore in FY23 and could likely reach Rs 8.5 lakh crore in FY24 assuming it keeps pace with nominal GDP growth,” ICICI Securities said in a report.

It added that corporates were moving beyond ‘maintenance capex’ towards ‘discretionary capex’ as seen in the ‘capex to depreciation ratio’ for listed corporates. The ratio rose to 1.6 times in FY23 after slipping below the 2-decade low of 1.5 times in FY02 to 1.3 times in FY21.

The peak ‘capex to depreciation’ ratio was achieved in FY08 at 4.8 times. CFO/capex at 1.6 times is relatively high but has begun to dip as capex nudges up and will likely result in higher industry credit demand going forward.

The PAT (profit after tax) to GDP ratio is expected to resume its expansion and reach around 4.7 per cent by FY24 largely driven by commodity companies which are positive for the capex cycle.

Aggregate state government capex, which remained a laggard in FY23, is expected to pick up pace in FY24 to reach Rs 8.4 lakh crore based on state Budget estimates and grow YoY at around 17 per cent on the base of FY23 BE. Assuming a slippage of 10 per cent, state capex could still reach the around Rs 7.6 lakh crore mark. The central government has already committed Rs 10 lakh crore (up 36 per cent YoY on an actual basis) in the Union Budget towards capex which, given the robust tax buoyancy, appears achievable.

Household investments in real estate were the biggest driver of GFCF in FY22 which accounts for 27.2 per cent 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,” ICICI Securities said.

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