Evidence Of Capex, Credit Cycle Driving Demand In The Economy: ICICI Securities

ICICI Securities Report

On the growth aspect, incremental evidence is pointing towards investments driving demand in the economy.

Q3 FY23 gross domestic product growth of 4.4% was largely supported by gross fixed capital formation growth of 8.3% while consumption (private final consumption expenditure) lagged at 2.1%.

Central government capex spends picked pace in Jan-23 and stands at Rs 7.2 trillion on a trailing 12-month basis (43% YoY growth) although state capex growth is lagging at Rs 5.5 trillion on TTM basis (10% YoY growth).

Corporate capex of listed space is showing signs of improvement with TTM aggregate capex rising above Rs 7 trillion level.

Non-food credit growth for Feb-23 was robust at 16.5%. Other high-frequency indicators supporting the ‘investment cycle’ include robust core sector growth, electricity demand, thermal plant load factor and diesel consumption.

Household investment in real estate, which is a significant portion of GFCF (25% share of GFCF in FY21), is showing signs of a cyclical upswing.

QT cycle triggered contraction in equity valuation for the Nifty50 from ~23 times in Oct-21 to sub-19 times currently. Bulk of the correction in stock prices emerged from the low volatility and expensive segment of the Nifty50 (more than 30 times forward price-to-earning) concentrated around quality financials (insurance, non-banking financial companies, private banks), consumption and IT.

The average forward P/E of the said stocks has dipped from ~54 times in Oct-21 to ~39 times currently.

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