India capex beginning to gather steam: IIFL Capital Services

24 Jan 2023 , 12:43 PM

Sharp uptick in project announcements by private sector, coupled with strong government capex and RE launches provide further confidence. Capex cycles follow profit & commodity cycles and are generally synchronous across countries. In 2023, lag effects of aggressive tightening done till now may upset many western economies, delaying capex. However, rapid fall in inflation could lead to a monetary pivot sooner than expected, and enable an earlier capex cycle.

Upgrades to capex estimates, strong order books and inflows

Capex estimates for the 161 non-financial companies covered by IIFL Capital Services have seen upgrades – for FY23 by 21% and FY24 by 18% — with a fairly broad spread, including Materials, O&G, Telecom and Utilities.

Order books for Infrastructure construction companies are swelling with book-to-bill ratio at around 3x. Similarly, order inflows for capital goods companies have seen a sharp uptick.

Significant uptick in project announcements led by private sector

CMIE aggregates point to private new project announcement at 7.5% of GDP — significantly above the 5-year average, though there is a long way to go. Stalled projects have come off by 2.5 ppt of GDP, down to 5%. Further, analysts at IIFL Capital Services continue to see healthy implementation rate at 60% of o/s projects (above 5-year average of 58%) and pickup in project completions.

Strong government capex, RE launches and other lead indicators further point to rise in overall capex

Central government’s capex has been running at ~30% CAGR in past 3 years, while capex for 19 major states show a flat growth until now, post 28% growth last year. Further, there has been rise in new RE launches, aided by strong demand (50% & 36% YoY growth in absorption in the past 2 years) and decline in inventory levels (down for ~2.5x annual sales pre-COVID to 1.5x currently). Other lead indicators like IIP for cap & infra goods, credit flow, engineering goods imports & MHCV domestic sales — all point to a pickup in capex activity.