The highlight of this edition of Capex Tracker is that while the capex cycle momentum has witnessed a marginal pick-up in Dec’22 quarter vs. Sep’22 quarter, there is a marked slowdown in the apex cycle momentum when it is compared to Dec’21 quarter. The private sector capex commentary is not upbeat as large corporates are delaying finalization of orders on account of global economic uncertainty. For example, while L&T witnessed strong order pipeline in Dec’22 quarter, Hindalco mentioned that the demand in building and construction segment has showed some softness.
A host of data points are alluding to loss of momentum in the capex cycle: 1) Investment proposals by private sector stood at Rs. 4.1tn during Jan-Nov 2022 vs. Rs. 7.7tn in CY21, 2) Environment clearances fell to 6,147 in CY22 from 7,234 in CY20, 3) Major sectors witnessed contraction in exports, 4) Small corporates (<Rs. 10bn ticket size) saw a decline in aggregate capex pipeline, 5) Credit growth to large corporates moderated to 6.5% in Jan’23 from 10.5% in Nov’22 and 6) State capex has been muted, leading to loss of order book momentum for government-spend proxies. On the other hand, falling unsold inventory & new launches trend in residential real estate, healthy revenue growth trajectory of industrial consumables and strong electronic goods exports indicate a stable capex cycle outlook. Other key highlights of the report are:
Capacity utilization marginally up: Though the pan-India capacity utilization has improved to ~74%, it is still below 80%, which could result in capacity creation. Utilization in core sectors like Cement and Steel stood at 68%/80% respectively. Ex-South (70% of industry capacity), the utilisation in Cement sector stood at 76% and the top six players in Steel (80% of capacity) are operating at ~85% utilisation. Thermal power PLF stands at ~63%.
Govt. capex – Muted trend in State govt. spending: Cumulative growth in States’ capex during 9MFY23 was muted at ~6.5% vs. ~21% budgeted for FY23. The aggregate state govt. capex stood at Rs. 2.9tn in 9MFY23 (45% of the budget). Higher interest cost burden, State Electricity board losses and focus on revenue expenditure might be the key reasons. On the other hand, the Central government capex grew 29% y-o-y to Rs. 5.7tn in 10MFY23.
Residential real estate – New launches fail to gather steam: Residential sales in Tier 1 & Tier 2 cities grew 10.5%/9% respectively on a 3Y CAGR basis in 10MFY23. Unsold inventory in Tier 1 /2 cities continued to moderate. Aggregate new launches during 10MFY23 in Tier 1 cities stood at ~3.6%.
Corporate capex – Large players yet to scale up: Looking at the aggregate capex announcement, credit offtake, sanction pipeline commentary & order inflow commentary of capital goods companies, it is quite visible that capex by large corporates in traditional sectors is yet to gather momentum. We have noticed some unfamiliar companies in renewables, green hydrogen/semi-conductor sectors announcing large capex in the recent quarter.
Exports – Engineering goods’ (ex-metals) growth softens in Q3FY23: Overall engineering goods exports fell ~3% yoy in 9MFY23. However, the growth of engineering goods, ex-metals, stood at 10.2% in the same period. Industrial & Electrical machinery and auto/auto ancillary sectors outperformed.
Order inflow trend – marginally up for government and private sector proxies: Core capital goods and core construction companies have seen their order inflows improving to 1.6x of the pre-covid average. The aggregate fresh order inflows for core capital goods companies grew by 0.8% while EPC companies’ (ex-L&T) order inflow declined by 11% on a y-o-y basis.
Commentary from corporates: Light engineering, B2C sectors, ESG (Waste heat recovery/industrial waste-water treatment) and renewables-related capex continue to witness improvement. However, ordering decisions are being deferred by large private sector corporates. The capex announcements by PSU companies are also getting delayed.
(Courtesy: AVENDUS SPARK STRATEGY)
