To Rise 30% in FY22-24; PLI a Booster Shot, Says CRISIL
Moneylife Digital Team 20 October 2021
The production linked incentive (PLI) scheme has given a much-needed booster dose to flailing capital expenditure (capex). Without it, capex would have likely taken nearly two years to touch pre-pandemic levels. The actualisation of the scheme will result in aggregate industrial capex rising 1.3 times through fiscals 2022-2024 in comparison to fiscals 2018-2020, says a research note.
In the report the ratings agency, CRISIL says, "Overall, private industrial capex appears to be getting into a whole new cycle after the pandemic hiccup – this time around armed with a new set of growth drivers. That said, the new capex cycle will depend on government support and policy measures, and the implementation thereof."
Last fiscal, the top 350-out of the around 15,000 manufacturing companies, including non-infra—listed and unlisted—on CRISIL's Quantix platform, deferred capex due to 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, CRISIL says, these 15,000 manufacturing companies spend Rs3.2 lakh crore to Rs3.5 lakh crore annually, with a chunky part of the capex being invested by large companies. The dispersion analysis of the capex spread shows that 62%-65% is spent by the top-350, 20%-22% by the following 1,400 companies, and a meagre 15%-18% by the next over 13,000.
To be sure, the ratings agency says, 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," it added.
According to CRISIL, 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.
"Leading indicators, too, confirm a recovery. The Industrial Entrepreneur Memorandum (IEM) filings with the government, the pace of environmental approvals, and the surge in foreign direct investments (FDI) investments have already crossed pre-pandemic levels," it added. 
The ratings agency sees the new capex cycle as 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 or 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 ops 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," it added. 
Over the past few years, especially during the pandemic, large companies in core industrial sectors like steel and cement and consumption sectors such as fast-moving consumer goods (FMCG) and pharma have gained significant market share. 
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. Prominent players operate at over 82% compared with smaller companies' 65% as of fiscal 2021.
The top-5 FMCG companies versus smaller players have seen the differential in their asset turnover leap from 8% in fiscal 2016 to 52% in fiscal 2021, CRISIL says. 
In addition, healthy volumes and a rise in commodity prices, especially for metals, have helped repair the leveraged balance sheets. 
According to the ratings agency, the resolution of a series of assets under the National Company Law Tribunal (NCLT) has also helped prominent 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," it added.
PLI, covering 13 sub-sectors, holds the potential to generate Rs2.2 lakh crore worth of capex over the scheme period of about three to four years. Of this, nearly 55% of the capex would be concentrated in the three sectors of advance chemistry cell (ACC) 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," the ratings agency says.
Udayan Dasgupta
1 month ago
Wonder where is the capex on renewable energy which is expected to get a boost in this report? It must equal or exceed the oil & gas capex projected? If it is not a part of "industrial capex" perhaps there is a case for looking at the larger picture? CRISIL should revise its classification which keeps such capex hidden.
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