The Ratings Overview released by Crisil Ratings in October 2022 highlighted a positive credit quality outlook for India Inc, resulting from resilient domestic demand, continued infrastructure-focused investment and strengthening balance sheets.
The green shoots of a recovery in the private sector investment cycle are now visible. The government’s continued focus on infrastructure development is increasing investment in related sectors, while a series of salutary trends – improving capacity utilization thanks to strong domestic demand, the program of incentives linked to production (PLI) and the China+1 strategy of global companies – are also conducive .
The evidence on the ground is also growing. According to a survey by the Reserve Bank of India, capacity utilization in the manufacturing sector is on the rise and reached 75% in the fourth quarter of last fiscal year.
Our interactions with companies, which have planned higher capital expenditures for the next fiscal year, bear witness to this.
Our recent analysis of 43 sectors which represent more than 70% of the rated debt (excluding the financial sector) of the Crisil portfolio shows that investment activity would be widespread in the infrastructure and consumer-related sectors. Of these, 26 sectors are consumer-related (including services) where we see investment levels well above pre-pandemic levels, with the exception of export-oriented ones.
At the aggregate level, planned capital expenditures in consumer-related sectors could exceed the pre-pandemic level by 30% in fiscal year 2024. In absolute terms, this number is expected to reach 1.8 to 2,000,000 ₹000 in FY2024 from ~₹1.45 lakh crore in FY2019 (pre-pandemic). This represents more than half of the capital expenditure of the entire consumer-related industry. Sectors likely to drive this recovery include automobiles and auto accessories, steel, bricks and mortar retail, hospitality, healthcare and chemicals. In export-oriented sectors, investments are expected to decline. The other 17 are infrastructure and related sectors and will continue to see investment spending facilitated by the government push. For example, according to Crisil Research, investments through National Infrastructure Pipeline are expected to be around ₹15 lakh crore per year on average over the financial years 2023-2025. It will also attract private sector investment in infrastructure and related sectors.
Healthier financial system
A healthier national financial system, with cleaner bank balance sheets and improved capital ratios, as well as debt-free corporate finances, is also a facilitator.
Banks’ asset quality has improved significantly following the resolution of large gross non-performing assets (NPAs) due to the insolvency and bankruptcy code. With a significant cleanup of the books in recent years, banks’ GNPAs are expected to fall to around 4% in the next fiscal year from around 11% as of fiscal 2018 and the average capital adequacy ratios of banks in the public sector improved to more than 15% in FY2022 from around 11% in FY2018.
India Inc’s deleveraging trend bodes well as it creates leeway to fund capital expenditures. For the Crisil portfolio, indebtedness is likely to fall below 0.5 times this fiscal year, compared to 1.4 times almost a decade ago, in fiscal 2014, thanks to cash flows healthy operating conditions and an injection of equity. However, as private sector investment spending increases, the extent of debt financing can be monitored.
While long-awaited private sector investment is expected to start sooner than expected, a larger than expected decline in global growth amid tighter financial conditions and a resurgence of Covid-19 infections in China could potentially push it back further. a few quarters.
On the domestic front, inflation remains tenacious and the recent rate hikes should impact demand. Crisil cut India’s GDP growth forecast to 6% for the next fiscal year from 6.5% previously.
So if you’re asking if animal spirits in terms of private sector capex have been invoked, the answer is yes – but not yet a resounding one.