Capex inching back above pre-covid levels; #alliesfin
Capacity utilisation dipped to ~60% on account of the second covid wave. Capacity utilisation remains well below the 75-80% required for any meaningful capex recovery and may continue to act as a drag on gross
fixed capital formation.
At the same time, high frequency capex indicators have inched back to above pre-covid levels, supported by the government’s infrastructure push.
The operating profitability of BSE Capital Goods companies has also witnessed a turnaround, although profitability growth slowed to 46.21% YoY in 2QFY22 from 135.1% YoY in 1QFY22 on account of margin
pressure, weighed down by rising raw material prices and a higher base.
Government capex spending remains supportive. However, emerging evidence suggests slowdown in sectors such as road construction. We had also highlighted in our report: Capex pipeline that NHAI’s capex
pipeline had slowed significantly post-pandemic despite increased activity over the past 18-20 months.
A favourable interest rate environment continues to support bank credit to the housing sector, which suggests that private household capex is leading the private capex cycle, which in turn is supporting Real
Estate demand.
Companies across sectors continue to deleverage, which in our view is laying the ground for an eventual capex recovery, although in the interim, it poses headwinds. Meanwhile, the interest rate environment
remains favourable for private capex.
Capex intentions are inching back above pre-covid levels, but quarterly new investments are still below their pre-covid peak.
In terms of new capex intentions, metals is the clear leader, accounting for over a fourth of private corporate capex followed by electrical equipment, chemicals and fermentation-based products - all of which are aided
at least partially by the production-linked incentive scheme (PLI).
Based on CMIE’s capex trends, most sectors remain below pre-covid levels, except for metals, machinery and chemicals.
By: via @AlliesFin Serve Stock Market
