Mumbai: Morgan Stanley highlighted that improved private corporate balance sheets, rising capacity utilization and various government policy initiatives is leading to a revival in India’s capex cycle. The combined capex of both private corporate and government will augment the capex cycle rate and this elevated trend in investment rate is expected to increase the share of corporate profit in GDP. It is expected that investment rate will increase to 36% of GDP by FY2027e from ~31% of GDP in FY2022 implying that capex could grow at a 16.7% CAGR over the next five years. Surging loan growth is expected to benefit large banks while higher profits will drive investment creating a virtuous cycle of higher wages, more consumption, more investments and more profits.

The improved balance sheets has been reflected in corporate debt to GDP being at a 15 year low and banking sector impaired loans at a 10 year low. Further, a sustained rise is expected in capital goods and engineering, procurement & construction (EPC) on the back of public and private capex spending. Over the next four years, it is expected that profits could grow at a CAGR of 25% which in turns means that Indian stocks are inexpensive and not as rich as they appear, given the likely capex boom.

Global recession is counted as a key risk that could have a potential downside risk to India’s cyclical growth momentum that could delay capex recovery. Furthermore, increase in global commodity prices could lead to tighter financial conditions while a change in policy reform could create business uncertainty and dampen business confidence.

Morgan Stanley is overweight on Larsen & Toubro, Hindustan Aeronautics, Bharat Electronics, Havells India, Voltas, Astral, Kajaria Ceramics within Industrials and ICICI Bank, State Bank of India within Financials.