NEW DELHI: An analysis of six key components of the economic cycle by global investment bank Jefferies suggests that conditions are ripe for a repeat performance of a 2003-10 style growth in India with fewer bad loan assets and high corporate profitability. ICICI Bank, State Bank of India, Lodha, DLF, L&T, HDFC, ACC, Kajaria and Supreme some of the stocks that are likely to gain from this expected growth in India as housing, bad loans and corporate profitability cycle have turned positive, while corporate debt is at a cyclical low. The broader capex cycle is yet to turn but it usually follows the housing boom with a lag. Here are the six key components that would drive growth:Housing is turning around: Historical data since 1996-97 suggests that India’s housing up-cycles and downcycles typically last four six to eight years. Since the period between 2012-2020 the housing sector witnessed an eight-year long slowdown, but 2021 has seen an improvement in both pricing and volume of transactions in both primary and secondary markets. Real estate sales and prices started picking up from the second half of 2020 while inventory levels have declines to 7-8 year lows. “The stage for the housing cycle revival has been set by improved affordability – an outcome of a) lower interest rates (at all-time lows – an off-shoot of the broader interest rate cycle) and b) prolonged phase of weaker pricing (partly on account of high positive real rates from 2014). Incentives like stamp duty cuts in some states, and easy financing options have resulted in housing sales jumping over two-fold during the July-September 2021 period at 62,800 units across seven major cities. Bad loans are down 60%: The bad asset cycle in India peaked in FY18 when gross non performing loans as a percentage of loans climbed above the 10% level to the highest since FY01. “Since then, the accelerated resolution programme through the bankruptcy regulations have helped to bring down the non-performing loans. Bank lending quality has also substantially improved, which has been reflected with no major bad asset surge seen post the Covid waves. Currently, bad assets are at FY04 levels and as a new lending cycle likely gets underway, and the ‘bad-bank’ furthers the clean,” the report said. Moreover, banks are well funded which is why post COVID stress was lower. Recently, the government also announced the formation of a ‘bad bank” to help speed up the bad-loan resolution process further, while several large corporate insolvencies like that of Bhushan Steel, Essar Steel and Jaypee Infratech have seen resolutions. Rising corporate profitability: Corporate profit growth was lacklustre from Financial Year 2011 to Financial Year 2020, growing by just 0.4%. The tide has now turned with FY20-22 earnings growth of 51%. Financials, industrials, real estate, autos, materials and metals are the sectors that have witnessed higher profitability. “This is driven by better banks balance sheets (NPLs at a low already), a decisive upturn in the housing cycle and a build-up of pent-up demand in the auto industry where sales are at multi-year lows, partly due to recent supply chain issues. The turnaround in global commodity prices is already reflecting in metal prices and profitability,” noted Jefferies. Jefferies expects profit growth to increase further to 15% between FY22 and FY24. Deleverage: Companies also used the slowdown in the last six years to reduce their debt levels. In fact the debt to equity ratio for 600-plus non-financial companies has come down from 1 times to 0.7 times. “Deleveraging cycle was last witnessed from FY02 to FY06, when the debt to equity ratio nearly halved to 0.36 from 0.64. There are some early signs of another deleveraging cycle to be in the offing with large debt holders like RIL, O&G PSUs, real estate sector and some large names in the metals space being the early deleveraging companies.” Interest rates will rise, representing improved growth: Jefferies believes interest rates have bottomed out and the Reserve Bank of India’s recent liquidity withdrawal is a clear sign of higher rates ahead. “An analysis of past cycle data shows that the benchmark 10-year yields rose from a low of 5% during 2003-04 to 8-9% range during the next several years, without impacting the cyclical recovery. The initial periods of a rate hike cycle usually coincide with economic / capex improvements.” This implies that higher rates, by themselves, do not put any breaks on the capex cycle. Also with low deposit rates, there is scope for investments in other options such as real estate. Corporate capex is set to rise: The housing and infrastructure cycle itself can drive corporate capex due to its deep linkages. As an offshoot of better balance sheets and the housing uptick, steel companies have already planned to expand capital expenditure in the next two years. “Corporate investment is still sluggish as capacity utilisation and risk appetite is low. Property uptick should help reduce risk averseness. Overall, the broader capex upturn should follow over the next 4-6 quarters,” said Jefferies. For instance, property upcycle in the past helped drive private investment in infra as well with large projects such as Yamuna E-way, Delhi & Mumbai airports, SEZs, Hyderabad metro, etc., being developed during the previous upcycle.