The Indian economy is on the cusp of an upturn in its capex cycle and early signs of a pronounced capex upswing have already begun to emerge. Gross domestic product (GDP) growth has averaged at about 8% over the last five years and is expected to grow at 8-9% over the next few years.
We believe that macro indicators such as huge project announcements, improving utilization levels in the system, improved business confidence, increasing end-product prices and expectation of significant demand improvement will lead to a growth in the capex cycle. Total fund raising by companies in FY10 has increased to 45% of the GDP.
Funds raised by companies grew 20.5% in FY10 compared with 18% in FY09. We believe that firms such as Thermax Ltd and Cummins India Ltd that have a strong product profile, capacities and technologies, are likely to be the beneficiaries.
The capex cycle, which started in 2004, took a breather between 2009 and 2010 as the world faced liquidity constraints, leading to dearth of demand affecting the prices of end products.
We believe that an interruption in the capex cycle seen over the last two years could resume and accelerate over the next few years. Rising economic growth momentum, improving domestic demand prospects and growing capacity utilization since FY09 have translated into a recent growth in capacity expansion plans as well as in actual project implementation.
Also See | Gearing up
The industry witnessed fresh investment announcements worth Rs9.5 trillion during April-September 2010. The continuous flow of investment announcements reflects the confidence of industries in sustaining the current upsurge in demand. More importantly, the current investment boom is not triggered by the government but by companies that are optimistic about the growth potential of the economy and are investing willingly. This is evident from the fact that the share of private sector in the outstanding investment has been rising steadily—from 39% in 2004 to 58% in 2010.
The order book for the sector stood at Rs3,235 billion, up 29% year-on-year (y-o-y), which is 2.9 times (trailing 12 months) sales and order inflow for the sector was up 19.3%.
The book-to-bill ratio for the sector has been improving consistently together with steady execution, which we think is an encouraging sign. Power continued to dominate the order inflow for most companies in the sector. The management commentary on industrial capex across companies sounded positive and we expect orders to pick up.
Out of the total projects worth Rs1,660 crore to be commissioned during 2010-13, infrastructure contributes about 28% (road, telecom, shipping, air among others), power contributes about 26.5%, followed by metal (ferrous and non-ferrous) and oil and gas with about 17% and others about 12% (cement, fertilizer, retail and hotels). Need for better infrastructure, improved demand, high utilization levels and higher end product prices is driving investment in most of these industries.
Edited excerpts from a report by Prabhudas Lilladher. We welcome your comments at firstname.lastname@example.org