Private sector capital expenditure in India is finally rebounding, with the announcements more than doubling in FY23 from pre-pandemic levels, and outpacing Central and state governments’ capex plans for the year. While India’s capital expenditure was largely driven by the government outlay since FY19, the private sector finally caught up with an outlay of Rs 26 trillion in the last financial year, up 85% on-year. Not only this, indicators such as capital utilisation and improving PAT/GDP ratio suggest that a broad-based capex revival is on the horizon.
Positive indicators for private capex revival
Investment proposals from companies
Companies are moving from ‘maintenance capex’ towards ‘discretionary capex’, and have begun to contribute to the capex cycle, with listed space capex rising 21% on-year to Rs 7.6 trillion in the previous fiscal. ICICI Securities predicted that number could rise to Rs 8.5 trillion in FY24, if it keeps pace with nominal GDP growth.
PAT/GDP ratio
The PAT/GDP ratio is projected to touch 4.7% in FY24, according to ICICI Securities. The surge in nominal GDP as a result of high inflation exacerbated the effect of contraction in the profit pool of commodities, which is a negative indicator for the capex cycle. However, the ratio is projected to expand and the growth will be driven by commodity companies, which is a positive sign for FY24’s capex outlay.
Factors contributing to the capex revival
Government push
The government remained a key driver of ongoing capex, with government capex up by 22.9% on-year in FY23, according to Nirmal Bang. Combined government capex rose to an all-time high of Rs 13.3 trillion, added ICICI Securities.
Credit Growth
As Indian banks’ capitalization levels are near decadal highs, allowing private banks to remain well capitalised to deliver on their credit growth aspirations, said a Nomura report. As a result, borrowers have ample availability in terms of financial resources to fund their capex plans. Credit growth levels clocked in at 15.6% in May 2023.
Stability in commodity prices
The beginning of the Ukraine-Russia war led to a sharp spike in commodity prices that have begun to see some moderation and stability. The profit pool of commodities is expected to swing from a contraction of Rs 1.1 trillion in FY23 to Rs 700 billion expansion in FY24, said ICICI Securities.
Risks to the capex revival
The capex cycle faces several risks that could impact its trajectory, according to ICICI Securities. If capacity utilisation stagnates in the 65-75% range, it would indicate underutilised potential. Experts are also signalling concerns regarding El Nino’s impact, which could lead to significant disruption in agricultural productivity, leading to rural stress. Additionally, the forthcoming election year would mean the government concentrates its efforts on revenue, rather than capital expenditure. If the credit markets and system liquidity see tightening due to unforeseen events, it could create challenges for the private sector in accessing finance.
Stocks to bet on during the capex revival cycle
ICICI Securities listed 25 stocks that are the brokerage’s top picks from an investment cycle revival perspective:
Industrials: Larsen & Toubro, NTPC, BHEL, KEC International, JSPL, Jindal Stainless, Bharti Airtel, HPCL, IGL, Greenpanel Industries, Century Ply, BEL, Gujarat Fluoro, Archean Chemicals, JK Cement
Discretionary Consumption: Interglobe Aviation, M&M, Jubilant Foodworks, Kalyan Jewellers, United Spirit, PVR Inox, Lemon Tree, Wonderla
Credit growth: Axis Bank, SBI