If capex is the holy grail, these two sectors might take you to it: ICICI Securities


NEW DELHI: Over the past decade, India’s gross fixed capital formation, a key metric of investment in the country, has grown at a pace that has significantly lagged the growth in nominal GDP.

Key drags on the investment rate since the financial year 2011-12 were the performance of the household sector and private corporates.

However, looking ahead,

identifies two sectors that hold great potential; to the extent of embodying what is a revered description in economic parlance – ‘animal spirits’.

These sectors are two that hold much importance as growth engines of the capital expenditure cycle – private industrials and real estate.


“In our view, the private industrial capex cycle in India has formed a bottom over the past few years as evidenced by the trend of aggregate capex , and we are in the first stage of the revival driven by animal spirits in terms of capex announcements by industrial corporates,” analysts from the brokerage wrote.

In the period from FY12 to FY21, the contribution of real estate within the household sector to the gross fixed capital formation plunged to 25.4 per cent from 37.4 per cent, while that of industrial sector corporates dropped to 14 per cent from 21 per cent.

That trend may now be set for a reversal, the brokerage said.

The real estate outlook is showing improvement in terms of a clear bottoming out of house prices after a decade of declining growth and of late strong absorption has been witnessed while mortgage rates are still at record lows, the brokerage said.

The impact is yet to be seen in stock prices, with the BSE Realty index having shed 5 per cent so far in 2022.

The term ‘animal spirits’ which was coined by the legendary British economist John Maynard Keynes to describe motivations behind decisions, including financial ones, also applies to the recent announcements of corporate mergers and acquisitions, ICICI Securities said.

A key point emphasised by the brokerage was that while inflation and interest rates are now on an upward trajectory, empirical evidence since 1990 shows that these two factors do not have a negative correlation with real estate prices.

Another factor brightening the view on this round of capital expenditure is that corporate fundamentals are supportive of the ‘animal spirits’, hence suggesting a lower chance of capital being misallocated in the initial stages of the capex cycle, ICICI Securities said.

“Improved cashflows and profits for core sector companies after a decade of downward pressure: Our proprietary metric of aggregate ‘CFO/capex’ of listed India Inc. is currently at a 2-decade high of 2.1x (Rs 12trn CFO vs Rs 6trn of capex),” the analysts said.

“PAT to GDP ratio is on an uptrend reaching a decadal high of 4.3%. Improvement in aggregate corporate profits and cashflows is largely driven by cyclicals, which are the heavy lifters in private capex.”

Furthermore, capacity utilisation rose to 72.4 per cent in the third quarter of the previous financial year at a time when bank credit growth is also emerging from decadal lows.


Better demand for capital-intensive activities and higher commodity price realisations for producers bodes well for an investment revival in sectors such as power, metals, energy, construction and manufacturing.

“Services sector like telecommunication, digital e-commerce and IT will continue to see increased investment demand going ahead,” the brokerage said.

ICICI Securities’ top picks from a potential industrial investment and real estate cycle include State Bank of India, Axis Bank, HDFC, Ultra Tech, Larsen & Toubro,

, Tata Steel, , NTPC, , , Ashok Leyland, , , and Greenpanel.

In the Budget for the current financial year, the government has set itself an ambitious Rs 7 lakh crore target for capital expenditure, up 35 per cent from a year ago and it seems likely that the Centre’s share in investment is set to rise even further.

“Government’s share of GFCF rose sharply from 10% to 16% during the decade from FY12 to FY21 and we expect it to rise further over FY22-23 going by budget estimates,”” the brokerage said.

Stock market bulls would be hopeful that the other drivers of investment also catch up to create the conditions for a virtuous cycle after the economic ravages of the COVID-19 pandemic.

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