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Capital expenditure (capex) in the financial year 2021 was mostly led by the government, as private sector spending was delayed with covid-19 hitting business operations. However, analysts at Bank of America (BofA) Securities estimate a pick-up in private capex from FY24 onwards. They expect order flow growth in FY22 and FY23 at 14% and 8% respectively, mainly led by government-funded infrastructure.

“We expect a further step-up in growth from FY24 once private sector capex accelerates as monopolies are opened. We see India on the cusp of a multi-year capex cycle, similar to that in FY03-12," BofA said in a note on 15 March.

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BofA believes the upcoming capex upcycle will be initially led by central government and PSU spending. The recent decisive and growth-focused budget with special emphasis on infrastructure, is a clear sign of the government’s view of easing India's long-term structural supply side constraints versus prioritizing demand-side stimulus. BofA sees over 20% year-on-year (y-o-y) ordering growth from central governemnt and PSUs in FY22.

Despite bottoming out, BofA estimates 8% private ordering growth in FY22 and 11% in FY23 (on a low base historically). Segments such as renewables and power transmission, which were opened up by the government broadly over the last decade, have seen a steady ramp-up in private capex, despite an overall private capex down cycle.

“We expect these segments to continue to attract private investments as India pursues its ambitious renewable energy plans of 175GW generation capacity by 2022. Monopolistic segments such as passenger railways, commercial coal mining, etc. are now being opened up, which we believe have the potential to provide upside, though with some lag, as seen in the previous cycles," it said.

According to BofA Securities, there could be $356 billion of projects awarded cumulatively in FY22-23, led by government funded infrastructure ($277 billion), private sector-funded infrastructure ($51 billion), real estate ($21 billion) and industries ($8 billion).

Though investors agree that capex will likely be stepped up, there are concerns about funding visibility. But BofA believes funding should not be an issue. It said higher fiscal deficits until FY26, government recycling capital by monetizing operational infrastructure assets, unlevered balance sheets of PSUs, room to expand leverage at government's infrastructure entities, private sector under leverage (balance sheet consolidation since FY15) and development finance institution (DFI) plans will make funds accessible for expenditure.

“While public capex growth over the period was decent at 12% compound annual growth rate (CAGR), we note that it was robust growth in private capex (29% CAGR) that helped accelerate the overall capex growth to 16% CAGR. In the process, the share of private capex in the overall capex mix rose from mere 14% in FY03 to an impressive 38% by FY12, with sectors such as power, roads, and airports witnessing a sharp pick-up in private participation," it said.

Post covid demand recovery has been strong across most sectors. Record high profitability led by higher commodity prices, coupled with utilization likely to improve to 90% (for primary steel producers) in FY22, could reinvigorate steel capacity additions to 6-7 mtpa over FY22-23 against a lull over FY20-21(1-1.5mtpa), according to BofA.

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