L&T, Thermax, Siemens, ABB Are The Top Capex Picks By Jefferies

India is on the path of capex cycle recovery despite global uncertainties, according to Jefferies.

The capex revival will lead to a re-rating of industrial stocks, especially when the choices are limited, the research firm said.

Jefferies continues to be 'overweight' on the industrial sector, with its preferred picks being Larsen & Toubro Ltd., Thermax Ltd., Siemens Ltd., Polycab Ltd., KEI Industries Ltd., and ABB Ltd.

"Like the global trend, the Indian rate cycle looks close to peaking," the research firm said in a note on May 8. "We do not expect the developed-world phenomenon of higher rates impacting growth through a slowdown in housing and corporate spending."

The Indian housing cycle has multiyear pent-up demand and is more dependent on pricing sentiment, which is strengthening now, according to Jefferies, which expects the property cycle to strengthen further over the next three to four years.

While corporate sector leverage is at a cyclical low, spending will rise in 2023, the research firm said in a May 8 note. "Indian banks are very well capitalised, and their Tier-1 capital to risk-weighted assets is at an all-time high", it said.

Helped by a property upcycle and various government initiatives that will drive capex, the risk appetite of Indian corporate and banks has gone up.

There are new private project announcements worth Rs 25 trillion for FY23, which is more than 150% from pre-pandemic levels, with credit growth at around 16% close to pre-pandemic highs, the note said.

Order flows in industrial companies have also picked up, with over 15% year-on-year growth from the pre-pandemic lows of 5%, according to Jefferies. The capacity utilisation rate of 73% is above the historical average, which gives optimism that India is entering a new phase of the capex cycle, it said.

Over the last decade, as private final consumption expenditure, i.e., consumption share in GDP, rose, there was a consistent re-rating in consumer stocks, Jefferies said.

The one-year forward PE of FMCG stocks, which was 20 times in 2011, is now 50 times, whereas consumer discretionary names (ex-autos) went up from 20 times to 70 times over the same period.

The re-rating was also a function of investors preferring to play the consumption theme rather than the weakening investment theme, Jefferies said.

Private final consumption expenditure as a share of GDP rose from 54.7% in FY11 to 61.3% in FY21 as the investment cycle weakened. The same has now peaked out and started to reverse in the last two years as gross fixed capital formation as a share of GDP has started rising, the research firm said.