Smaller engineering companies may benefit from higher capex
Moneylife Digital Team 30 August 2010

An Edelweiss Securities survey points out that infrastructure companies have firmed up higher capex plans over the next two years. This will benefit smaller engineering companies

A strong sentimental boost amid robust economic growth is likely to translate into a sustained capex programme for India Inc over the next couple of years, says Edelweiss Securities. This expansion drive is likely to be led by infrastructure companies, who will account for 40% of the capex planned by India Inc. This may mean a windfall for small electrical, electronics and engineering companies, as the corporate giants loosen their purse-strings and place orders for equipment and machinery.

The survey conducted by Edelweiss among its coverage universe of around 200 companies finds that the overall capital expenditure of India Inc will go up by 24% for this fiscal year. Out of the total planned capex of around Rs5,60,000 crore, infrastructure (40%), power utilities (19%), metals and telecom (14% each) will account for a large chunk of the investments. The expansion thrust by infrastructure companies will result in a strong order-book for engineering companies, especially Cummins India, Siemens, Thermax, among others. Some of the major companies to have firmed up big-ticket expansion plans include Bharat Heavy Electricals Ltd (BHEL), Larsen & Toubro (L&T), Gujarat State Petronet Ltd (GSPL), Reliance Industries Ltd (RIL), National Thermal Power Corporation (NTPC), GVK Infra and GMR Infra among others.

Vikas Khemani, executive VP & head - Institutional Equities of Edelweiss Capital pointed out that the only bottleneck to the capex programme of these infrastructure companies remains from the pending government clearances in terms of land acquisitions, environmental approvals etc. The recent delay in execution of some projects was only due to this factor.

Analysis by Edelweiss suggests that only 10% of the companies surveyed are apprehensive of meeting their guidance or expect to incur a lower capex in FY11 and FY12. Almost 90% are confident of either maintaining or exceeding their capex programme target.

Interestingly, a whopping 75% of companies in the survey are incurring capex based on growth as the key agenda. Edelweiss states, "The balance expenditure is more due to routine maintenance capex led by the media sector, all consumer based industries like FMCG, retail and auto are also investing for growth as they believe consumer demand is making a comeback."
Commenting on the impact of a rising interest rate scenario on companies' investment plans, Edelweiss states that even if the cost of credit jumps 50-100 bps from the current level, credit growth and, hence, investment demand will continue to gather demand. "If the underlying demand in the economy and the business expectations of future demand are robust enough, the rising cost of credit could be absorbed by corporates fairly easily because they enjoy the pricing power during times of robust demand. In fact, at such a stage, rising cost of credit is actually a testament to the robust economic recovery and is reflected in rising credit growth," says Edelweiss.

Comments
Shibaji Dash
1 decade ago
A very useful tip for any retail investor . Thank you so much.
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