Tuesday's Talking Points
Private Capex – Are Animal Spirits back?
What’s the Point? (A Brief Summary)
Investments in fixed assets by listed companies stood at ₹8.1 lakh crore on a trailing 12-month basis as of September 2023, increasing by 17% over September 2022 levels. This rise has been primarily driven by key industries such as energy, automotive and industrials. With nearly 75% of capex of listed companies (25% of total capex) coming from listed private companies, this aligns well with the Government’s vision of boosting domestic manufacturing and the creation of an Atmanirbhar Bharat.
Putting Data into Perspective
Chart 1: Significant Rise in Capex across Government and Listed Corporates
Source: ICICI Securities Research, *TTM: Trailing Twelve Month
Chart 2: Private Capex breakup by Sector (in ₹ billion)
Source: ICICI Securities Research. Data as of September 2023
Why has there been an optimism around Private Capex?
- Recent GDP Growth indicating a pick-up in Private Capex
The recent Q2FY2024 Real GDP Growth of 7.6% showed investments in the economy, measured by Gross Fixed Capital Formation (GFCF), grow at 9.5% in H1FY24, and at 11.0% in Q2FY24. While government capex continues to grow at a strong pace, private capex is also seeing a turnaround, owing to the introduction of supportive policies by the Government. CMIE data indicates that 86% of new project announcements (in INR terms) in the past 12 months were from the private sector. Capex reported by Listed corporates has also seen a sharp growth – over 2 times between FY2017-19 ₹10-12 lakh crore range and FY2024 trailing 12-month level of ₹23.9 lakh crore. (see chart 1).
- Rising Capacity Utilisation potentially supporting the rise in Private Capex
At the aggregate level, capacity utilisation (CU) in the manufacturing sector stood at to 73.6% in Q1FY2024. While this is lower than Q4FY2023, this is higher than the CU in the same quarter last year (72.4% in Q1FY2023). Furthermore, the seasonally adjusted CU for Q1FY2024 improved by 130 basis points (bps) from its level in the previous quarter, and stood at 75.4%. This rise in CU should ultimately result in new capacity addition over time.
- Higher Profitability lending comfort to Companies to take on Leverage for Private Capex Plans
In a recent Tuesday’s Talking Point named “HDFC Mutual Fund's Tuesday's Talking Point - Rising Corporate Profitability bodes well for India's Growth Story!” (dated November 28, 2023), we had discussed that India’s corporate profitability has risen to 4.7% on a trailing 12-month basis. A partial reason for this rise in corporate profitability has been the leverage ratio of large listed companies being at 15-year lows. During such conditions, companies would have a higher confidence in taking on leverage for funding their private capex for potential expansion. As per RBI Governor’s statement, the total flow of resources to the commercial sector from banks and other sources has grown by 21% in the current financial year, standing at ₹17.6 lakh crore.
Key Risks to the Investment Cycle
- Slack in the economy persisting with capacity utilisation stagnating in 65-75% range
- Uncertainty about the impact of El Nino
- Combination of rural stress and election year pushing government spending towards revenue expenditure
- Slump in global demand and animal spirits
- Liquidity and credit market becoming extremely tight due to unforeseen events.
Conclusion
Capex is investment towards long term assets such as infrastructure, plant and building, development facilities such as institutes, or facilities around irrigation. Capital expenditure gives economic returns in terms of demand and income growth over long periods of time. Pick up in capex from private sector is a key positive as private capex tends to be directed towards the most productive sections of the economy, where returns are expected to be the highest. This bodes well for sustained economic growth in the country, and potentially furthers the rise in corporate profits in India.
Sources: RBI, ICICI Securities Research, and other publicly available information.
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