Industrial investments in India to rise 30% in FY22-24: CRISIL

  • Industry News
  • Oct 21,21
Without PLI scheme, capex would have likely taken nearly two years to touch pre-pandemic levels, says CRISIL Research. PLI holds the potential to generate Rs 2.2 lakh crore worth of capex over the scheme period (3-4 years).
Industrial investments in India to rise 30% in FY22-24: CRISIL

Mumbai

Industrial investments in India are expected to rise 30% in FY22-24 as the stage is set for private investment cycle with new growth triggers and Production Linked Incentive (PLI) scheme in place, according to CRISIL Research.

Industrial capex slows, large companies save the blushes
Last fiscal, the top 350 of the ~15,000 manufacturing firms (non-infra – listed and unlisted) on CRISIL’s Quantix platform deferred capital expenditure (capex) because of the Covid-19 pandemic. This led to an estimated 14% contraction in their capex, albeit less than a 21-23% decline for the entire industry.

Typically, the ~15,000 manufacturing firms spend Rs 3.2-3.5 lakh crore annually, with a chunky part of the capex being invested by large firms. The dispersion analysis of the capex spread shows that 62-65% is spent by the top 350, 20-22% by the next 1,400 firms, and a meagre 15-18% by the next 13,000+. 

To be sure, the past decade witnessed a relatively muted private industrial capex cycle, especially during fiscals 2013-2017, on weak demand, strong supply and leveraged balance sheets. While fiscals 2018-2020 did see a revival, it was largely led by regulatory capex in the oil & gas and automotive space (emission norms compliance) and large metal firms. Then the pandemic struck, causing sector-wide capex deferral.
 
Macro and micro triggers are set for a recovery 
CRISIL Research expects industrial capex to pick up, driven by: 
  • Conducive government support through policy measures such as the Production-Linked Incentive (PLI) scheme and reduced tax rates 
  • Accommodative monetary policies and lower interest rates 
  • Commodities upcycle, which has benefitted metal and cement players by repairing their balance sheets 
  • Rising merchandise exports 
  • Supply chain diversification 
  • Healthy balance sheets 
  • Global liquidity 
The external environment for the capex cycle in the current decade will more likely resemble that seen in the first decade of the century (2000’s) in terms of global liquidity, monetary policies, liquidity, and healthy balance sheets.

PLI a booster shot 
The PLI scheme has given a much-needed booster dose to flailing capex. Without it, capex would have likely taken nearly two years to touch pre-pandemic levels. Actualisation of the scheme will result in aggregate industrial capex rising 1.3 times through fiscals 2022-2024 in comparison to fiscals 2018-2020.

The new capex cycle will be relatively distinct compared with earlier cycles on several counts. First, asset-heavy sectors such as metals, cement, and mining will see more localised investments, led by large players at their existing sites (brownfield capex). In comparison, asset-light ones such as pharma, telecom equipment, mobile, and electronics will see more greenfield capex, led by PLI as well as supply chain diversification. Second, the pandemic-induced focus on digital and automation will spur growth. Third, rising emphasis on environmental, social, and governance (ESG) compliance will trigger green capex towards energy transition, especially for core industrial sectors.

 

Large firms in core industrial sectors (steel and cement) as well as consumption sectors (fast moving consumer goods or FMCG and pharma) have gained significant market share over the past few years, especially during the pandemic, necessitating further investments. 

In the steel sector, large and small players operated at a similar utilisation rate of 73-74% in fiscal 2016, but the gap has widened over the years. Large players operate at 82%+ vis-à-vis smaller firms’ 65% as of fiscal 2021.

The top five FMCG companies versus smaller players have seen the differential in their asset turnover leap from 8% in fiscal 2016 to 52% in fiscal 2021.

Further, healthy volumes and rise in commodity prices (especially for metals) have helped repair the leveraged balance sheets. Resolution of series of assets under the National Company Law Tribunal (NCLT) has also helped large players gain market share. This has resulted in large players announcing a series of expansion plans for the next three years followed by greenfield capex from fiscal 2024 onwards.



PLI, covering 13 sub-sectors, holds the potential to generate Rs 2.2 lakh crore worth of capex over the scheme period (3-4 years). Of this, nearly 55% of the capex would be concentrated in the three sectors of ACC (advance chemistry cell) battery, automotive, and specialty steel. 

Asset-light sectors such as telecom, mobile, and IT hardware are expected to incur lower capex. However, many incentives have been doled out to attract investments in order to plug the import bill in these high growth segments. Further, the back-end value chain of these segments will eventually set up shop locally in the medium term.

Article Source: CRISIL Research

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