Conditions Similar To Early 2000s Could Aid Capex Revival: Crisil

A combination of global liquidity, low interest rates and healthy balance sheets, the conditions which backed a pick-up in the investment cycle in the early 2000s, could support a rebound in capex over the next couple of years.

According to Crisil Research, a number of macro and micro triggers could come together to kick-start a private investment cycle. These include:

• A ratio of free cash flow to capex, which is at a decadal high of 1x.

• Low corporate tax rates and decadal low interest rates.

• Rising capacity utilisation across large firms in key sectors like steel.

• Government support through policy measures such as the Production-Linked Incentive scheme.

While industry-wide capacity utilisation has remained well below 80%, larger firms are using up more of their installed capacity, data from the report shows.

"Large firms in core industrial sectors (steel and cement) as well as consumption sectors (fast-moving consumer goods or FMCG and pharma) have gained significant market share over the past few years, especially during the pandemic, necessitating further investments," Crisil said.

For instance, in the steel sector, large players are operating at a utilisation rate of close to 82%, compared to 65% for smaller firms.

Improved capacity utilisation, together with deleveraged balance sheets, have resulted in large players announcing a series of expansion plans for the next three years, said Crisil, adding that greenfield capex may follow from fiscal 2024 onwards.

Crisil also cites the 'Industrial Entrepreneur Memorandum' filings with the government, the pace of environmental approvals, and the surge in foreign direct investments investments in support of its view that a revival of the capex cycle is in the offing.

The IEM filings, according to the report, are showing investment activity at its highest in a decade.

Metals and electrical and electronics have the highest share in announced investment intentions.

Asset-heavy sectors such as metals, cement, and mining will see more localised investments, led by large players at their existing sites (brownfield capex), said Crisil. In comparison, asset-light ones such as pharma, telecom equipment, mobile, and electronics will see more greenfield capex, led by PLI as well as supply-chain diversification, it added.

In addition, pandemic-induced digitisation and focus on environmental, social, and governance or ESG will drive green capex, the report said. "That said, the new capex cycle will depend on government support and policy measures, implementation thereof."