Fortune 500 India: Capex takes off

ON JUNE 24, Mukesh Ambani, Chairman and Managing Director of Reliance Industries Ltd. (RIL), said that his company achieved a net debt-free balance sheet after raising $44.4 billion through a mix of equity sale, rights issue and asset monetisation in FY2021. Addressing shareholders virtually at the 44th annual general meeting, he announced a mega investment in sunrise sectors. “Initial investment from our internal resources in the new energy business will be over $10 billion in three years,” he said. RIL registered a net profit of ₹53,739 crore in FY2021, 34.8% more than the previous year.

The growth template laid out by India’s largest business enterprise is not something unique. Hundreds of Indian companies have been utilising the Covid-19-induced economic disruption to become leaner and financially healthier. This means they are ready to make fresh investments in capacity addition and expansion.

JSW Steel, for instance, plans to spend around ₹28,000 crore to expand steel-making capacity from 24.5 million tonnes (MT) to 36.5 MT by March 2024, Tata Motors is investing ₹28,900 crore in subsidiary Jaguar Land Rover and hydrogen fuel cell vehicles in FY2022, while Adani Ports and SEZ Ltd. is planning a capital expenditure (capex) of about ₹4,000 crore in FY2022. Similarly, Aditya Birla Group has budgeted ₹2,600 crore for capex this year, while another group entity, UltraTech Cement, has set aside ₹1,500 crore. Telecom major Airtel says its FY2022 capex may be $5 billion, up from $4.6 billion the previous year, as it gets ready to offer next-generation services (including 5G) in the coming years. The list goes on.

Soumya Kanti Ghosh, Chief Economic Advisor, State Bank of India, agrees that the FY22 scenario is optimistic with announcements of investing around ₹5.6 lakh crore in first four months (April-August 2021) itself. “Around 70% (of that) is coming from the private sector,” he says.

The return of India’s private capex cycle is fuelled by multiple factors. The Production-linked Incentive (PLI) Scheme of the government has been tailor-made to encourage private investments and lower corporate tax rates mean companies have more money. Also, inflow of foreign funds remains strong, accommodative monetary policy is ensuring sufficient liquidity, and demand (both domestic and export) is rising after hibernating for years due to economic slowdown, and of late, the pandemic. The rise in capex, though, is not across sectors. There are visible signs of investment revival in renewable energy, commodities, real estate, pharmaceuticals, electrical and electronics sectors. However, services sectors such as tour- ism, hospitality and travel, hit by the pandemic, will wait for the economy to enter the post-Covid-19 growth phase before loosening their purse strings.

The PLI Push

On the eve of Diwali (November 3), the Central government announced names of 42 companies, including Panasonic, Hitachi, Havells, Syska and Surya Roshni, that have committed to invest ₹4,614 crore to set up facilities for manufacturing components and sub-assemblies of air-conditioners and LED lights under the PLI Scheme. To be implemented over a seven-year period, from FY2022 to FY2029, the scheme’s aim is to ensure mass manu- facturing of a host of items across the value chain of air-conditioners and components such as LED drivers, LED engines and LED light management systems. White goods is among the 13 sectors that have been covered by PLI schemes till date. The schemes for pharma, medical devices, mobile phones and IT hardware and electronics are in advanced stages. The scheme envisages a cumulative investment of over ₹2.2 lakh crore. Over ₹60,000 crore is expected only from two critical components of the green energy business advanced chemistry cell batteries and solar PV module manufacturing. This is in addition to the action outside as renewable energy is attracting huge investments even without PLI. “Over the next decade, Adani portfolio companies’ investments across the green energy value chain will range between $50 billion and $70 billion,” Gautam Adani, Chairman, Adani Group, said at a global investor summit hosted by the UK government at Science Museum, London, on October 19.

Visible Signs

In a recent interaction with Fortune India, Finance Minister Nirmala Sitharaman emphasised that private sector investments, particularly in core sectors such as steel and cement, are coming back on track. Real estate companies are also clearing inventories, she said. Sitharaman believes many companies cleared their debts after the government reduced corporate tax rate in 2019 and, with their burden lightened this year, are expanding capacities. “After reducing corporate income tax in October 2019, it was only reasonable to think that private investments will improve,” she said.

Sitharaman’s optimism stems from the following factors. One, the pandemic years have seen record FDI inflows. While FY2020 saw a 20% jump to $74.4 billion, in FY2021, the inflows rose further to $81.9 billion. In April-June 2021, India received $22.5 billion FDI. Two, statutory Industrial Entrepreneur Memorandum (IEM) filings suggest that 594 projects worth ₹2.7 lakh crore have been implemented up to September this year as against ₹2.3 lakh crore during FY2021. Three, during April-September 2021, exports of almost every item rose considerably over the same period last year. Petroleum product exports grew 136%, gems and jewellery 122% and engineering goods 61%.

“IEM filings, pace of environmental approvals and surge in FDI have crossed pre-pandemic levels. The PLI Scheme has given a much-needed booster dose to flailing capex. 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 an October report by CRISIL Research.

The research firm says that in FY2021, top 350 out of 15,000 manufacturing firms (non-infra, both listed and unlisted) on CRISIL’s Quantix platform deferred capex because of the pandemic. “This led to an estimated 14% contraction in their capex, albeit less than the 21-23% decline for the entire industry. Typically, the 15,000 manufacturing firms spend ₹3.2-3.5 lakh crore on capex annually. About 62-65% of that is spent by top 350, 20-22% by next 1,400 and a meagre 15-18% by next 13,000-plus firms,” it says. CRISIL says the emerging capex cycle will be relatively distinct than the earlier ones. “First, asset-heavy sectors such as metals, cement and mining will see more localised investments, led by large players at 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 Scheme and supply-chain diversification. Second, the pandemic-induced focus on digital and automation will spur growth. Third, rising emphasis on environmental, social and governance compliance will trigger green capex towards energy transition, especially in core industrial sectors,” says the report by CRISIL experts: Isha Chaudhary, Mohit Adnani and Shreenath Patki.

Challenges Ahead

While there are reasons to be optimistic, the fact remains that investment growth looks attractive when compared with peak pandemic months but not very impressive if you take a longer term view. “If you compare it with last year, it will certainly show an improvement. But if you look at the past trend, for the last several years, it (growth in private investments) has been very weak. Whether we have been able to gain lost ground, that is the question,” says Devendra Kumar Pant, Chief Economist, India Ratings & Research.

Pant says demand growth has been tepid for a couple of years. “Why will an entrepreneur invest? There has been a demand revival when compared to last year, but if you look at the trend growth, it has been going down. The private final consumption expenditure, which is 50-60% of GDP, has been slowing down for a couple of years now. It had slowed down to 5.5% in FY2020 from 8.1% in FY2017.”

One problem has been wage growth. “Whether you look at corporate balance sheets or national accounts data, wage growth has been slowing down. If you look at the household savings rate for the past couple of years, it has been a straight line. But if you look at a longer period, with 2011-12 as the base year, household savings in FY2020 were lower by 400 basis points (bps). Also, if you look at the personal loan to GDP ratio, it has gone up by 350 bps. We have dipped into our savings and borrowed more. On a net basis, we are worse off. Again, if you look at it based on last year, it will look very good. But if you look at the medium term, it will show that even with whatever recovery we have, we are two or three years back in terms of trend growth,” he says. He, however, agrees that there are certain sectors where investments were happening even during bad times and that the PLI Scheme will make a difference.

Mahesh Vyas of research firm Centre for Monitoring Indian Economy (CMIE) says quarterly new investment proposals had fallen by 30% in six years before the Covid-19 pandemic. “The fall in the year of the pandemic was a dramatic 55%. New investment proposals per quarter fell to ₹1.9 lakh crore. The situation in first two quarters of FY2022 is not much better at ₹1.8 lakh crore per quarter,” he says. In other words, there may be signs of a revival, but it is too early to rejoice. Supportive government policy measures, and its timely implementation, can speed up the revival.