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Highest capex in a decade will be strong tailwinds for infra, manufacturing


India is at the cusp of a new multi-year capex cycle after a lost decade. We are optimistic about two broad trends — the manufacturing shift and infrastructure spending. Encouraged by a sharp jump in revenues and profits in the post-pandemic period, the management commentary has been very bullish during the Q1FY22 results season with many companies indicating capex plans to meet increased demand.

Analysts expect capex in core sectors such as cement, metals, oil refining and power to be around Rs 5 lakh crore, which is not only highest in a decade but also likely to be more than double the capex spent over the previous three years.

Spending heavily on infrastructure development, the government aims to significantly boost the manufacturing sector to contribute an all-time high of about 25 per cent of GDP by 2025, from below 16 per cent currently.

The current phase has various similarities with the capex cycle of 2003-2008. The first few years in that phase was marked by excess liquidity, low inflation, NPAs bottoming out, improving commodity prices, strong private participation from steel, cement and power sectors, positive global outlook and a strong real estate market, all of which are being observed in the current phase too. With over a decade gone by since the last capex growth phase, conditions currently point to a revival in the investment cycle.

Consumption demand in the form of increase in discretionary consumption, festive season, rural resilience, global growth and exports would be the key drivers to trigger manufacturers to expand capacities as capacity utilisation picks up. Urban demand is also likely to accelerate, with the release of pent-up demand and faster pace of vaccination.

Currently, the government has set out aggressive targets for spending on manufacturing and infrastructure sectors over the next five years. Making this a reality will be the capex push from government infrastructure expenditure on roads, railways, airports and smaller projects such as bridges, dams and irrigation projects.

For instance, in FY2021, national highway contracts awarded saw a jump of about 23 per cent over the previous year, while road construction activity touched a high of 37 kms per day. Furthermore, government has been encouraging PSUs to frontload their capex and the planned PSU capex for FY22 has jumped by 13 per cent. For FY22, the union budget has allocated Rs 5.54 lakh crore for capex, which is 26.5 per cent higher than the provisional actuals of Rs 4.25 lakh crore in FY21. In his Independence Day speech, the Prime Minister announced a Rs 100 lakh crore ‘Pradhan Mantri Gatishakti’ initiative for holistic infrastructure growth.

Another well-timed initiative is the production-linked incentive (PLI) scheme spread across 13 sectors. This is likely to result in an increase of capex in industrial sectors of 45 per cent-55 per cent in FY22, thus fast-tracking private sector capex plans by at least 2 years.

As a means to fund these initiatives, the National Monetisation Pipeline scheme aims to monetise assets worth Rs 6 lakh crore between by 2024-25, a move which is likely to further benefit infra-centric sectors.

Post pandemic, many economies are working towards supply chain de-risking and are considering a China-Plus-One strategy in manufacturing and sourcing. India is poised to benefit from this sourcing model, the domestic import substitution and export opportunities given that India has a strong export product overlap with China and it is ahead of competing countries in terms of availability of labour and port infrastructure.

In the last few years, India has undertaken a slew of significant structural reforms such as reduction in corporate tax rates (from 34 per cent to 25.2 per cent), RERA implementation, GST implementation, IBC, liberalised agricultural trading and these have further accelerated formalisation of the economy, indirectly improving demand and ultimately leading to a positive impact on capex.

Top players across cement and steel sectors are already reporting more than 85 per cent utilisation, paving way for higher levels of incremental capex. Environmental clearances have also shown a sharp spike in CY20. New commodity, machinery and transport equipment related manufacturing investment projects have jumped on two year CAGR basis.

Apart from all these, US infra stimulus worth $1 trillion could open up opportunities for large Indian engineering conglomerates and subsidiaries of MNCs. As per a report by Bank of America, orders worth $356 billion are expected to be awarded over two years.

All these factors put together are likely to usher India into a virtuous cycle of capex and consumption, and this cycle will keep expanding over a period of time due to several favourable factors playing out together.

(Anand Shah is Head of PMS & AIF at ICICI Prudential AMC. Views are his own)



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