Capex picture brightens

By: |
October 20, 2021 4:30 AM

Real estate, digital economy key drivers; PLI a catalyst, too

real estateRising interest rates should not deter promoters from borrowing because the returns on investment are likely to be good, thanks to better infrastructure facilities

The chatter on capex is getting louder with meaningful spends expected over the next four to six quarters. CRISIL estimates investments in industry could rise 30% in FY22-24, driven by a booster shot from the PLI (production-linked incentive) scheme. PLI, across 13 sectors, could potentially generate capex worth Rs 2.2 lakh crore over 3-4 years, CRISIL believes. Indeed, even though capacity utilisation is sub-70%, there are a host of factors that have set the stage for some meaningful capex.

Foremost among these is the sharp and somewhat unexpected upturn in residential real estate. Thanks to lifestyle changes, stagnant asset prices and low interest rates, demand for homes has seen an unprecedented rise post the second wave, leaving inventories in several markets depleted. An analysis by Jefferies reveals that post a prolonged downcycle between 2012/13 and 2020/2021 is seeing an upcycle with visible uptick in volumes and pricing. An uptrend in real estate—with its multiple linkages—could see makers of a range of products relook expansion plans. The second big factor that will kickstart capex is the rise of the digital economy.

The e-commerce and start-up sectors—funded by foreign capital—are providing employment in large numbers, to both white- and -blue collar workers. This is creating purchasing power and will boost consumer demand which has somewhat subdued for a couple of years now. The IT sector continues to hire in big numbers. Indeed, the big rush for new cars is evidence of purchasing power.

To be sure, companies may wait for better visibility on demand. But many have got going. Several steel-makers, for instance, have announced expansion plans; makers of capital goods have also seen orders for electric, environment-protection and energy conservation equipment. The fact is companies are in better shape than they have been in years. Cash-flows improved in FY21 with net profits for a sample of nearly 2,000 companies surging 50%. Going by the speedy recovery, they might do almost as well in the current year. Moreover, they are far less leveraged than they were even a year ago.

According to Credit Suisse, the share of debt with an interest cover of less than one fell to around 32% (excluding auto) for the past four quarters, the best reading in last seven years. Moreover, banks are holding up well, with less-than-expected damage to their balance-sheets from the pandemic. They will, of course, be a lot more cautious this time around, especially while lending to long-gestation infra projects and more so if the promoters are not able to bring in adequate capital.

For their part, mid-sized business groups—some of whom burnt their fingers the last time—will probably be handicapped by lack of equity capital for a few more years. As such, it is the larger business groups, like the Tatas and Birlas, that are expected to lead the way with brownfield expansions. Rising interest rates should not deter promoters from borrowing because the returns on investment are likely to be good, thanks to better infrastructure facilities.

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