Private capex revival may be round the corner: India Inc

A recovery in capacity utilisation and a rise in order books appear to be signalling the revival in private capital expenditure. According to the RBI governor’s statement released on Friday, capacity utilisation (CU) in the manufacturing sector recovered further to 72.4% in the third quarter of FY22 from 68.3% in the previous quarter.

The CU has surpassed the pre-pandemic levels of 69.9% recorded during the fourth quarter of FY20. Investment activity may gain traction with improving business confidence, pick up in bank credit, continuing support from government capex and congenial financial conditions, it added.

The rise in investment activity would also lead to a comeback of private capex as companies look to further improve utilisation, as demand picks up following an easing of the pandemic and geo-political tensions, industry captains said. The growing order book of capital goods players points to traction in private capex in FY2023, according to a report by ICRA.

“We are seeing a steady pickup in trade finance. Companies with investment grade ratings are able to raise cash at decent pricing these days. Private capex is bound to increase in the near-term considering the lack of expansion for a long period,” Muthoot Forex chief executive officer Rajesh Jayachandran said.

Some of the key industries showing healthy capex include energy (power generation, predominantly renewable and storage, transmission, oil & gas, green hydrogen), digitalisation (including data centres), core industries (cement, metals) and corporate sectors (automotive, mobility, pharmaceuticals, chemicals and textiles among others), ICRA report added.

Early to rejoice
“Although it is too early to celebrate the return of private sector capex, some tailwinds exist. Improved ability to raise capital at competitive rates and availability of liquidity are significant enablers to evaluate capex programmes. Sectors like steel and cement are adding capacities to take advantage of the pricing power they seem to enjoy currently,” R Shankar Raman, chief financial officer, Larsen & Toubro said.

“Thrust to PLI (Production Linked Incentive) schemes have also contributed to capacity creation plans among the private sector players. Usually, capex cycles are long-duration developments and we could see the private sector capex picking pace over the next three years or so,” he added.

“In my view, there will be a private capex increase for all sectors where Production Linked Incentive (PLI) schemes are available, as the whole objective of the scheme was to incentivise people to spend money, increase capacity and localisation. Under the PLI scheme, the government was targeting about `42,000 crore of investment in the auto sector alone, but commitments received were over Rs 70,000 crore. This would be the case across other sectors also,” Sunil Bohra, chief financial officer at Minda Industries, said.

The RBI keeping the policy rates unchanged at 4% and an expected easing of tensions in the Russia-Ukraine crisis would give a much-needed impetus to the industry in general.

“Unlike in the US or developed economies, inflationary concerns do not affect capex in India. The current inflation is mostly commodity price-driven and the one during the pandemic was affected by the supply chain. The scenario will improve once the Ukraine crisis ends, and it has already been factored in corporates’ plan for capex. The growth in FY23 will be driven by investments in green projects, be it green hydrogen, electric vehicles and solar power,” Rajiv Agarwal, managing director of Essar Ports, said.

“The capex cycle has revived in both private and public major ports after the pandemic. Consistent capacity expansions have happened in the brownfield infrastructure space, where concessions have been awarded for terminal expansion or development of berths,” Agarwal added.

However, Hindustan Construction Company chairman and managing director Ajit Gulabchand has a “cautious outlook”, given the uncertainties around supply chain, inflation, China imposing lockdowns and fear of the pandemic still looming large.

“Capex comes when there is demand and you have to invest above your 100% capacity to meet that demand sought from you. So, from that point of view the demand had been low. Now, even though there has been improvement in sentiment, due to the Ukraine war there is a great disruption in supply chain, while inflation has raised its head, and China has closed down. Till the uncertainties continue, the possibility of capex increasing in this period will be low. I will wait for a few months to see how things pan out,” Gulabchand said.

Impediments
However, the country’s capex revival hinges on a number of issues as most Indian corporates are ready to take the plunge.
“Given the kind of upheavals the banking system has seen, if they are willing to take exposure to infrastructure projects, then there is a lot to be invested in. Also, unless we develop the bond market and debt market vibrantly, we will keep facing these kinds of cyclical issues. It is also time to develop horizontal infrastructure, such as efficient public transport, rail, road and bridges, which will go a long way in balancing the entire stress of inflation,” Vishal Kalantari, managing director at Balaji Infra Projects, promoter of Dighi Port, said.

“This will give the common man investible savings that finally goes in funding the capex. Government should also try to meet its divestment targets and invest the proceeds in development of infrastructure. The proceeds from the LIC IPO should be invested in such a way that it balances out India’s fuel requirement and fuel import bill. These measures will go a long way in meeting India’s capex cycle revival,” Kalantari added.