ICICI Securities' Top Picks As Capex, Cyclical Stocks Are Back In Favour
The key positive drivers of this capex upcycle are the "buoyant animal spirits" in capital-intensive sectors, ISec said.
The availability of cheaper finance due to relatively lower interest rates has brought capex intense and cyclical stocks back in favour, according to ICICI Securities.
The brokerage expects capital expenditure by listed companies, including state and central governments, to exceed Rs 21 lakh crore in FY23 due to a strong real estate and credit cycle.
Capex by listed corporate hit an all-time high of Rs 7 lakh crore on a trailing 12-month basis versus Rs 6.4 lakh crore in FY22, the research house said in a Nov. 28 note, driven by capital-intensive industrial corporates.
The combined government's (states and center) capex has also reached a record high of Rs 12.3 lakh crore on a TTM basis and is expected to exceed the budgeted target of Rs 14 lakh crore in FY23, the brokerage said.
"Buoyant animal spirits" in capital-intensive sectors like energy, power, mining, infrastructure, construction materials, real estate, digital infrastructure, and production-linked-incentive-scheme-incentivised sectors are the main things that are making this capex upcycle go in the right direction," ICICI Securities said.
Ample availability of financial resources (internal cash generation, tax buoyancy and bank credit) and relatively low interest rates are also boosting capex allocation, it said. Rising capacity utilisation and credit growth are also contributing factors.
"Stability in commodity prices following the spike seen at the start of the Russia-Ukraine conflict, as well as expectations of future peak interest rates, have mitigated the key potential risks to the capex cycle."
ICICI Securities also listed some risks to the investment cycle:
The economy remains sluggish in terms of capacity utilization, which remains stuck in the 65-75% range.
Despite a normal monsoon forecast for CY22, urban real estate demand is slowing and rural demand is weak.
Slump in global demand and animal spirits.
Liquidity and credit market are becoming extremely tight due to the unforeseen events
The brokerage said capital-intensive, cyclical, and value stocks have been outperforming since FY21, thereby, reversing the trend seen over FY12-FY20.
"We attribute this paradigm shift in factor performance to pockets of demand emerging in the economy as well as the corporate profit pool trajectory, which is led by stocks associated with the investment rate, credit cycle, and high-end discretionary consumption."
It also listed its top picks from a capex and credit cycle perspective: