Capex greenshoots visible; cement and steel sectors doing well: L&T

Is India at the start of a capex cycle? Companies expand capacity if their current capacity is nearing full utilization. Last available Reserve Bank of India (RBI) data was as of Q1 April-June quarter, which was COVID-hit quarter and indicates that capacity utilization was as low at 60 percent versus 69 percent in Q4 but the July-September quarter numbers are not available.

Pre-COVID, according to RBI data, capacity utilization was running at 73-74 percent. Economists note that capex picks up when capacity utilization crosses 80 percent. Analysts now say, time is ripe for the restart of capex: ICICI Securities showed data that cashflow from operations of companies is at a 2.2 times their capex and this is a 2-decade high.

Last time cashflow was so high compared to capex in 2002-2004 and that was a huge capex boom period.

Finally, government capex is picking up. Tthe April-September data shows 2021 capex at 2.29 trillion is much better than 2020, but if one compares it with 2019, it is 22 percent higher, which is a compounded annual growth rate (CAGR) of only 10 percent. States spend twice the amount that centre spends, but not in the past 2 years because of fiscal strain and lower transfers from the center.

“Some kind of greenshoots at capex are bound to happen and will happen. It is taking some time but we see offshoots of it happening in many parts,” said SN Subrahmanyam CEO of Larsen and Toubro (L&T).

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“We do see private capex in certain specific areas. We see some expansion in steel and cement plants. There are various electronic and smaller factories which are coming up. I would say the capex is more from the central government, the multilateral funded jobs and to a certain extent on the private side, which is more on the basic infrastructure capex like cement and steel,” he said.

According to him, the renewables have gone through a massive churn in the last few months.

He expects solar prices to settle down in next 3-4 months. “I don’t see the solar going in the same manner that it went on a few months back,” he said.

According to Sesagiri Rao Group CFO of JSW, last two quarters, because of the second wave of COVID-19 and monsoon, domestic demand was a bit subdued and exports were quite high.

“Whereas in the month of October, we are seeing a good recovery in the domestic demand. Therefore, now the domestic demand will drive the second half of the financial year as far as steel is concerned,” he said.

He sees very good demand in the metal sector.

“Demand is coming majorly from two areas – one is infrastructure spend by the government and also very strong recovery in the demand in global markets,” he said.

He believes it is a beginning of the capex cycle and it will accelerate going forward.

“Because the monetary and fiscal policies of various governments are in favour to the revival of demand and also the growth oriented policies both together capex cycle revival will commence,” he said.