New corporate buildings sit under construction in the Bandra Kurla Complex of Mumbai, India. (Photographer: Prashanth Vishwanathan/Bloomberg)

Business Spending Is India's Emerging Stock Theme: Credit Suisse

(Bloomberg) -- India equity investors should draw a line under richly-valued consumer stocks and move into companies involved in heavy-engineering projects, according to Credit Suisse Group AG.

The brokerage sees a pickup in capital spending and cheap valuations as the justification to own stocks of industrial companies contracted to implement projects, and their lenders.

"We’re going through this situation where consumption growth is slowing and investments are picking up," said Neelkanth Mishra, an India equities strategist at Credit Suisse. While a 7 percent pace of economic growth trails India’s potential expansion prospects, it compounds to about 40 percent over five years and “you need capex to cater to that demand," he said.

Business Spending Is India's Emerging Stock Theme: Credit Suisse

"Consumption is now going to disappoint and weigh on valuations," Mishra said, after favoring consumer stocks since 2011. A gauge of consumer discretionary stocks trades at an estimated price-to-earnings ratio of 25, compared with about 21 for the benchmark S&P BSE Sensex index.

The "massive" impact of a pay increase that added about 4.5 trillion rupees ($64 billion) to civil servant salaries and pensions will fade away, while capital expenditure is showing signs of picking up, he added.

Mishra is overweight on industrials and likes banks that will fund investments in Asia’s third-largest economy. His top buy suggestions include Larsen & Toubro Ltd., Bharat Heavy Electrical Ltd., State Bank of India and ICICI Bank Ltd., according to a Credit Suisse report dated Dec. 17.

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