Capital goods production in the Index of Industrial Production has picked up sharply since December, and although the pace moderated a bit in February, it’s still a huge 44% rise year-on-year.
That is an indication that the recovery in the economy, which was being led by consumer goods, particularly consumer durables, is now shifting to capital goods. The government had so far been supporting investment in infrastructure, but there are clear indications that companies are now looking at expanding capacity. With investment demand finally kicking in, the economy will have an additional engine of growth.
The Centre for Monitoring Indian Economy (CMIE) says that industry is expected to see capacity additions worth a massive Rs6.5 trillion in the current fiscal, which will be the highest annual capacity commissioning ever.
Graphic: Yogesh Kumar/mint
Adding up the investment schedules of companies, CMIE says that 2,413 projects worth Rs8.7 trillion are scheduled to be commissioned in the current fiscal, of which at least 75% will be completed in 2010-11.
The maximum capacity additions will be in steel, aluminium, electricity, cement and tyres. In fact, Rs2.7 trillion worth of investments have been announced in January and February this year.
Other analysts, too, expect a big rise in investment demand.
According to Angel Securities Ltd, “To achieve the estimated sales growth of 22-24% over FY2010-12E, we expect industry to add P&M (plant and machinery) worth Rs2.64 trillion in FY2012E compared to the P&M addition of around Rs1.60 trillion in FY2009, implying 18% CAGR over the period. Consequently, on account of the substantial ongoing and anticipated increase in industrial activity, we have a positive outlook on the capital goods and commodities sectors over the next two years.”
Morgan Stanley, while cautioning that capacity utilization is still probably not full and the peak in utilization may be a couple of quarters away, says: “Cost of capital; state of the balance sheet; capacity utilization; and corporate profits and, hence, confidence on growth. The availability of capital is definitely improving whereas the cost of capital remains low relative to history. Corporate balance sheets are in good shape with debt-equity ratios reasonable; capacity utilization is rising, thanks to acceleration in growth and the fall in capital spending over fiscal 2008 and fiscal 2009 and, most importantly, confidence in future growth is rising, epitomized by improving corporate profits.”
The problem is that while investment demand is certain to pick up, the market seems to have already anticipated that. The Bombay Stock Exchange’s capital goods index is already trading at past price -earnings multiple of around 30.
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