New phase of capex cycle to start soon, say analysts. Top stocks to bet on

India Inc could be embarking on a new phase of capital expenditure (capex) cycle, believe analysts, and suggest that its revival will lead to re-rating of industrial stocks going ahead.

Helped by a property upcycle, analysts at Jefferies believe various government initiatives are likely to drive capex going ahead. Indicators, they said, include private new project announcement at Rs 25 trillion for FY23 (up 150 per cent from pre-pandemic levels) and credit growth at around 16 per cent, which is close to pre-pandemic highs.

"Order flows in the industrial companies have also picked up, with over 15 per cent YoY growth from the pre-pandemic lows of 5 per cent. Capacity utilisation at 73 per cent is above the historical average, which gives us optimism that we are entering a new phase of the capex cycle," wrote Mahesh Nandurkar, managing director at Jefferies in a recent coauthored note with Abhinav Sinha and Nishant Poddar.

At the bourses, capital goods stocks have seen a good run this far in calendar year 2023 (CY23) with the S&P BSE Capital Goods index rallying 12 per cent, as compared to the S&P BSE Sensex that has moved up around 1.5 per cent during this period.

"A meaningful capex cycle revival in India is likely to start later this year once the Reserve Bank of India (RBI) ‘pauses and pivots’. A change in monetary policy stance will not only lower borrowing costs, but also be a big boost for an uptick in demand. All this will augur well for capex revival. L&T remains the best stock to play this theme, besides Siemens, ABB, and BHEL," said G Chokkalingam, founder and head of research at Equinomics Research & Advisory.

At the bourses, Larsen & Toubro (L&T) hit a record high of Rs 2,366 on Monday (previous high of Rs 2,329.90, hit on April 11, 2023). The counter has surged over 13 per cent thus far in CY23, and is up over 37 per cent in the last one year.

Meanwhile, over the last decade, as the Private Final Consumption Expenditure (PFCE), i.e., consumption share in gross domestic product (GDP), rose, the consumer stocks got rerated, Jefferies argues, with one-year forward price-to-earnings (PE) of FMCG stocks, which was 20x in 2011, surging to 50x now. Consumer discretionary names (ex-autos) went up from 20x to 70x over the same period, it said.

"The re-rating was also a function of investors preferring to play the consumption theme rather than the weakening investment theme. PFCE as a share of GDP rose from 54.7 per cent (FY11) to 61.3 per cent (FY21) as the investment cycle weakened. The same has now peaked out and started to reverse in the last two years as GFCF (Gross Fixed Capital Formation) as a share of GDP has started rising," Nandurkar, Sinha and Poddar wrote.

Applying a similar trend as seen in the consumption cycle to capex cycle, Jefferies believes that the capex revival will lead to re-rating of industrial stocks. That said, the brokerage suggests that there are limited choices available to play the capex revival theme, especially as a few large names, such as Larsen & Toubro (L&T), Adani and the cement sector, suffer from ESG issues as well.

"We continue to remain overweight on the industrial sector with our preferred picks being L&T, Thermax, Siemens, Thermax, Polycab, KEI, and ABB. Some of these stocks are already re-rated but with the expected earnings growth of 25-30 per cent CAGR over FY23-25, the stocks could outperform even if PEs sustain," Jefferies said.

Those at ICICI Securities, too, continue to be overweight on the capex revival theme. L&T, BHEL, Siemens, NTPC, NHPC and ONGC are some of the stocks within the capital intensive and cyclical themes they remain bullish on, as per their recent note.