Capex plans revive as demand picks up3 min read . Updated: 08 Dec 2020, 07:59 AM IST
- Growth rebound prompts companies to step up investments
A rebound in the Indian economy, spurred by pent-up demand and government spending, and the cheapest money in two decades, have prompted metals and cement producers, among others, to resume their capital spending plans, gradually pulling out of an almost year-long slump.
The cement industry was the first off the block to announce new capital expenditure plans. Last week, UltraTech Cement, India’s largest cement maker and the flagship of the Aditya Birla Group, announced a ₹5,477 crore capex programme to increase its capacity by 12.8 million tonnes per annum.
“The cement industry has been witnessing healthy volumes post relaxation of lockdown, on the back of the government’s thrust on infrastructure, underlying demand from the rural economy and individual home builders," Kumar Mangalam Birla, chairman of Aditya Birla Group, said on Thursday. The new capacity is expected to go on stream by March 2023.
On Monday, the group’s flagship metals company, Hindalco Industries, announced the start of a ₹7,000 crore capital expenditure programme to double its downstream aluminium capacity to 600,000 tonnes with a new ₹730 crore extrusion plant in Silvassa.
The resumption of spending plans is a sign Indian companies are turning optimistic about a quick economic revival. Private capital spending to complement that of the government is critical to a faster economic recovery in India, which is headed for a record contraction in the current fiscal.
Green shoots on capex are also visible in the realty sector. Prestige Estate Projects had said that it intends to start work on Bandra Kurla Complex and Mahalakshmi Mumbai commercial office from the fourth quarter of this year, with an investment estimated at ₹2,800 crore. These projects are likely to be completed in the next four years.
With manufacturing activity, indirect tax revenues and highway toll collections picking up, analysts expect the manufacturing sector to loosen its purse strings first while public capex and the services industries would lag. This may lead to a “two-track recovery", with exports, manufacturing capex and pockets of real estate leading, whereas services and leveraged consumption lagging behind.
To be sure, most firms, saddled with inventory and low capacity utilization, still remain cautious about capital spending.
“We foresee the capex landscape (marred for the past 10 years) perking up in select pockets amid global reflation," Edelweiss Securities said in a 2 December note to clients. “Among key categories—government capex, corporate tradeable (manufacturing), corporate non-tradeable (services), housing and others—we expect good traction in manufacturing capex (tail-lifted by exports) and pockets of real estate (upper income, metros) helped by lower rates. However, services capex is likely to lag, including telecom that has potentially peaked out."
Rising international steel prices, low input costs and domestic demand recovery have helped large steel mills deliver blockbuster performances in the September quarter. That is expected to continue in this quarter . However, steel mills—some of the largest capex spenders—are still unwilling to recommit to their postponed investment programmes. In a recent interview, T.V. Narendran, managing director and chief executive of Tata Steel Ltd, said despite the recent recovery the company would not be reconsidering its decision to slash its annual capex budget of ₹9,500 crore by half this fiscal.
“Private capex is going to be tough for another two years," S.N. Subrahmanyan, managing director and CEO of Larsen and Toubro Ltd, told reporters after the country’s largest engineering and construction firm announced its second-quarter earnings.
For those willing to take advantage of the prevailing low interest rates, there are encouraging signs. “We see a revival in the economy, with demand picking in the building and construction and automotive sectors. This has given us the confidence to move forward. The Silvassa facility will enable us to service our customers faster, with an offering of high-end quality aluminium products," said Satish Pai, managing director of Hindalco Industries.