India is currently witnessing a robust investment cycle, marked by a steady upturn in the Capex to GDP ratio for the third consecutive year. This revitalization comes after nearly a decade-long slowdown, offering promising prospects for sustained growth. The key factors driving India’s investment resurgence and the potential it holds for global investors.
Reviving capex cycle:
The investment downturn that persisted for a decade is now a thing of the past. Capex as a percentage of GDP has rebounded, reaching a 9-year high of 30% in the last three years (FY22-24E). Initially fueled by government investments, the upturn now encompasses the property sector and corporate spends, showcasing a comprehensive revival.
Property sector uptick:
The residential property cycle, which faced a downturn since 2013, is now on a sustained upswing. Factors such as Real Estate Regulatory Act (RERA) reforms, improved affordability, and reduced inventory overhang have contributed to a significant turnaround since 2020. Jefferies analysis suggests that the property cycle still has approximately 5 years to go, presenting lucrative opportunities for investors.
Corporate capex resurgence:
Corporate spending, a crucial component of the Capex cycle, is experiencing a notable resurgence. High capacity utilization rates, low gearing ratios for corporate balance sheets, and robust banking sector capitalization provide a favorable environment for sustained growth. The enactment of insolvency laws in 2016 has played a pivotal role in cleaning up corporate books, resulting in a decade-long deleveraging journey.
Digital revolution and start-up ecosystem:
India’s Internet economy has given rise to over 100 unicorns in the last decade, positioning the country as the third-largest unicorn hub globally. Supported by factors such as data affordability, high smartphone penetration, and a robust digital payment infrastructure, the Indian start-up ecosystem is witnessing exponential growth. This ecosystem spans diverse industries, including SAAS, e-commerce, fintech, and healthtech.
Services export and remittances:
India has emerged as a major player in services export, with double-digit growth in the IT services and Global Capability Center (GCC) sectors. Remittances, driven by a vast diaspora, have surpassed US$100 billion for the first time in FY23, making India the world’s largest recipient. The combination of IT services, GCC growth, and remittances provides a strong cushion to India’s Balance of Payments.
Market valuations and investment opportunities:
Despite absolute valuations appearing high, the Indian market offers compelling investment opportunities. Earnings growth in the range of 12-15% over the medium term, disciplined corporate RoEs, and steady domestic inflows into mutual funds contribute to a resilient market. PEG-based valuations indicate reasonable pricing compared to regional benchmarks.
Strong domestic flows and market stability:
The popularity of Systematic Investment Plans (SIPs) has contributed to consistent domestic flows into the Indian equity markets, countering the volatility associated with foreign institutional investor (FII) flows. With nearly 80 million SIP accounts, India showcases a resilient and steadily growing domestic investor base. Lower market volatility and a deep pool of investable stocks further attract institutional money, fostering efficient price discovery.
India’s investment renaissance is a testament to the nation’s resilience and potential for sustained economic growth. With a multifaceted upturn in government investments, property sector, corporate spends, and the thriving digital ecosystem, India emerges as an attractive destination for global investors. The current investment cycle, with approximately 5 more years to go, sets the stage for exciting opportunities and potential returns in the coming decade.
Source: Jefferies: Equity Research