India should see a surge in investment, according to Morgan Stanley, which named several stocks it believes could benefit from rising capital spending in the economic powerhouse. Morgan Stanley analysts, in a note titled “How to play India’s looming capital boom,” said they expected supply-side factors to align with improving demand, boosting investment in gross domestic product. “A likely boom in capital investment makes Indian stocks look cheap,” wrote Morgan Stanley analysts led by Girish Achhipalia. “The most important component of profit is the rate of investment. Higher profits in turn drive investment creating a virtuous cycle of higher wages, more consumption, more investment and more profits.” The bank projects that India’s investment rate will reach 36% of its GDP in the next five years, up from around 31% currently. That means capital spending could grow at a compound annual growth rate of 16.7% through 2027, the bank added. India is the world’s fifth largest economy and is expected to have a GDP of $3.53 trillion in 2022, according to International Monetary Fund estimates. Stock exchange Morgan Stanley sees industry and finance as the main beneficiaries of the capital investment boom. “Capital goods, engineering and construction as well as big banks are direct plays to India’s growing capital,” Achhipalia added. One of the bank’s top picks is India’s largest construction firm Larsen & Toubro. The bank believes L&T is in the “sweet spot” to benefit from investment growth, with the share price having a “strong correlation” with public equity. The shares are also attractively priced, Achhipalia added. Morgan Stanley has a target price of INR 2,178 ($27.50) on the stock, which closed at around INR 1,962 on Monday, representing a potential upside of 11%. Read More Forget oil – coal is hot right now. Here are 2 stocks to play, according to the pros, Sterling is tanking against the dollar. Here’s how low it could go, according to the pros Looking to invest in real estate? These REITs are among the favorites of analysts Morgan Stanley also likes ICICI Bank and State Bank of India (SBI). “Banks with a liquidity or liability franchise are best placed to deliver profitable earnings growth… We believe large banks are best positioned to capitalize. ICICI and SBI remain our preferred picks to play the equity cycle,” said Achhipalia. Achhipalia believes that ICICI is one of the best positioned among the private banks that are making high profits in the current cycle and has assigned a price target of INR 1,225 on the stock. ICICI shares closed at around Rs 907 on Monday, implying a potential upside of 35.1%. It also “substantially” increased its loan growth for SBI – India’s largest public sector bank. The stock is also trading below its long-term average, making it look attractive from a valuation perspective. Morgan Stanley has a price target of INR 675 on SBI, which closed at around INR 555 on Monday – an implied gain of 21.6%.