At over Rs 6 trillion, capex on new projects sees 44% jump in Q3

Governments and companies kicked off new roads, factories and other new projects worth Rs 6.1 trillion in the December quarter.

This is a 44.3 per cent increase compared to the previous year, shows data from project tracker Centre for Monitoring Indian Economy (CMIE). Private sector companies are likely to keep an eye on the upcoming budget on deciding the future course of such capital expenditure (capex), according to experts. This budget is the last major one for the current government before elections in 2024.

The data also showed a 49.9 per cent year-on-year drop in completed projects, and an 87.5 per cent decline in stalling rates (see chart).

Management commentary for the first half of the financial year suggests more investments from the government than the private sector.

“The government’s thrust on capex is presenting opportunities across core sectors such as transportation, steel, refineries, defence, etc,” according to the November 11, 2022 earnings call of public sector engineering and manufacturing company Bharat Heavy Electricals Ltd. The firm noted railway orders for locomotives, power sector orders for substations and compressors from private and public sector players in the refinery segment.

Infrastructure company Larsen and Toubro said in its October 31, 2022 earnings call that central government and public sector undertakings (PSUs) spending had buoyed capex numbers in the first half of the year. State government capex was yet to revive, and private capex remains smaller than government spends, though better than before in the second quarter (Q2). There was some increase in orders for buildings and factories in the minerals and metals sectors.

“In Q2 our share of private within the domestic orders, was 29 per cent vis-à-vis 22 per cent last year,” noted a company spokesperson during the call.

“It would be restricted to certain sectors,” said Bank of Baroda chief economist Madan Sabnavis of the general trend in private sector capex. Sectors like steel, cement, chemical and capital goods could see some traction. But overall capacity utilisation is expected to take a hit amid lower growth next year. Consumption, exports and investments are all seen to face headwinds which leaves limited room additional capex, according to him. Companies in the pharmaceutical space have not seen additional traction after the fading of Covid-19. This is likely to be the case going forward as well, unless there is a spike in cases, Sabnavis added.  

Companies do not typically invest in increasing the production capacity by setting up new factories unless their existing capacity is close to being fully utilised. Companies’ capacity utilisation is at 72.4 per cent of June 2022 noted the Reserve Bank of India’s Order Books, Inventories and Capacity Utilisation Survey (OBICUS). The survey is released with a lag, with the latest data for the June 2022 quarter released in September.

Global volatility has created an atmosphere of uncertainty, affected also by weak demand especially from the rural side; said Azeem Ahmad - Head of Portfolio Management Services and Principal Officer, LIC Asset Management Company.

"If private capex has to kick in, at least there should be 2-3 years of visibility," he said.

Some policy direction from the government could be a factor in recent times for pushing capex, as this budget is the last major one before the elections. People are likely to keep an eye on it before making capex decisions, according to Ahmad.

"Maybe three months down the line, by March, there will be a clearer picture," he added.