Improving capex to drive investment demand; ICICI Securities suggests these 17 stocks to buy now

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ICICI Securities is bullish on at least 17 stocks considering the improvement in capex, investment and related credit cycle. In the large cap space, the brokerage likes Larsen & Toubro (L&T), UltraTech Cement, Hindalco, Bharti Airtel, NTPC, ONGC, Gail, State Bank of India and Tata Motors. On the other hand, it has ‘Buy’ on Cummins, Oil India, Motherson Sumi, ACC, Tata Communications, KEC, CESC and JK Lakshmi in the midcap and smallcap space.

In a report on August 25, ICICI Securities said that the ratio of cash flow to capex for India Inc has reached a two-decade high level of 2.2 times which was last realised around the commencement of the previous capex cycle in 2002-04. It further added that resilient global commodity prices and improving capacity utilisation in sectors such as steel and cement to drive investment demand.

Among the other key factors which are conducive for the capex cycle, the brokerage said, “Weighted average lending rates for corporates have been on the decline over that past few years while ‘wholesale price inflation has reached double digits. Low real interest rates and surplus banking system liquidity are positive for investments along with enough risk appetite for other capital-raising avenues such as equity and bond issuances.”

It further highlighted that communication and services related to broadcasting, transportation infrastructure and public administration and defence improved their share in the ‘gross fixed capital’ (GFC) or investment by 480 basis points (bps), 180bps and 150bps to reach 6.5%, 5.9% and 10%, respectively, since 2015. However, real estate is the largest contributor to the fall in GCF since 2015 with its share falling by a massive 590 bps to reach 22%. Other key sectors that have seen a drop in their share of GCF include utilities, manufacturing and mining.

Overall, the government’s capital expenditure and net lending stood at Rs 1.1 lakh crore in Q1FY22, a YoY growth of 27.6%, and a sharp 78.4% higher than Q1 FY2020.