Private capex – Are animal spirits back?

– By HDFC Asset Management Company Limited

Investments in fixed assets by listed private manufacturing companies stood at Rs 8.1 lakh crore on a trailing 12-month basis as of September 2023, increasing by 17 per cent over September 2022 levels. This rise has been primarily driven by key industries such as energy, automotive and industrials. With nearly 75 per cent of total capex (~Rs 6 lakh crore as of September 2023) coming from private companies, this aligns well with the Government’s vision of boosting domestic manufacturing and the creation of an Atmanirbhar Bharat.

At the aggregate level, capacity utilisation (CU) in the manufacturing sector stood at 73.6 per cent in Q1FY2024. While this is lower than Q4FY2023, this is higher than the CU in the same quarter last year (72.4 per cent in Q1FY2023). Furthermore, the seasonally adjusted CU for Q1FY2024 improved by 130 basis points (bps) from its level in the previous quarter, and stood at 75.4 per cent. This rise in CU should ultimately result in new capacity addition over time.

A partial reason for this rise in corporate profitability has been the leverage ratio of large listed companies being at 15-year lows. During such conditions, companies would have a higher confidence in taking on leverage for funding their private capex for potential expansion. As per RBI Governor’s statement, the total flow of resources to the commercial sector from banks and other sources has grown by 21 per cent in the current financial year, standing at Rs 17.6 lakh crore.

Capex is investment towards long term assets such as infrastructure, plant and building, development facilities such as institutes, or facilities around irrigation. Capital expenditure gives economic returns in terms of demand and income growth over long periods of time. Pick up in capex from the private sector is a key positive as private capex tends to be directed towards the most productive sections of the economy, where returns are expected to be the highest. This bodes well for sustained economic growth in the country, and potentially furthers the rise in corporate profits in India.

(The article is authored by HDFC Asset Management Company Limited.)

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