Capex cycle to touch ₹21 lakh crore in FY23, but there's a catch

• Private corporates’ capex in the listed space has risen to an all-time high of ₹7 lakh crore on a trailing twelve-month basis.
• The combined state and central government capex has risen to an all-time high of ₹12.3 lakh crore on a TTM basis, states a report.
• Analysts believe while the capex by the central government is rising, contributions by CPSEs and states show a different picture.

Capital expenditure by the Indian government as well as listed private companies has risen to an all-time high on a trailing 12-month or TTM basis, says ICICI Securities. Their combined capex is expected to touch ₹21 lakh crore in FY23, the report predicts.

Listed private companies’ capex, driven by capital intensive industries, nudged up to ₹7 lakh crore. Combined government capex (state and central) rose to ₹12.3 lakh crore on a TTM basis, the report says.

As per the report, key positive drivers for the capex cycle in India currently are — buoyant animal spirits in capital-intensive sectors such as energy, power, mining, infrastructure, construction materials, real estate, digital infrastructure, PLI-incentivised sectors etc. It is also aided by ample availability of financial resources (internal cash generation, tax buoyancy and bank credit) and relatively low interest rates; and rising capacity utilisation.

“The said trends are reflected in the ‘investment rate’ along with construction activity leading the GDP recovery post FY21 which is expected to continue,” the ICICI Securities report says, adding that there is continued evidence of a pick-up in household investments in real estate.

Cash flow to capex ratio dips as working capital requirements rise
On the other hand, however, the cash flow from operations/capex ratio for listed entities has dipped to 1.5x. While companies are spending more on capex as well as working capital, their cash flows are impacted by sharp drop in realisations and cost pressures for commodity companies like oil marketing companies, metals, cement and others. This will eventually lead to a rise in demand for industry credit, the report says.

In the services sector, capex is likely to be driven by investments in the communication sector in the form of devices and infrastructure. “However, the contact-intensive services sector is just recovering from the Covid pandemic and could see a lag in investments. IT services and new age economy services could see some moderation in investments as risk-appetite reduces towards these sectors,” says the report.

Capex by centre, CPSEs and states show a different picture
Capital expenditure by the union government, central public sector enterprises (CPSEs) and state governments form the combined public sector capex. In the past 18 months, central government capex has surged sharply by 52% on year in the first half of FY23, according to a report by Motilal Oswal.

“In the first half of FY23, the centre’s capex amounted to ₹3.2 lakh crore, which was higher than the annual capex bill of FY21 (or any previous year); it stood at ~60% of FY22 capex,” said the report.

Analysts at Motilal Oswal say that although the centre’s capex has increased, the public sector capex stood at 6% of GDP in FY22, lower than 6.1% of GDP in FY18/FY19 but higher than 5.8% of GDP in FY21.

“More importantly, while the Centre’s capex is budgeted to rise in FY23, it is likely to contract for the third consecutive year for CPSEs and remain broadly stable for states. Accordingly, public sector capex is likely to fall to an eight-year low of 5.7% of GDP in FY23,” said the report.

According to analysts, while the centre’s capex numbers show an increase, the numbers of public sector enterprises and state governments paint a different picture.

“Therefore, instead of focusing on only one section of the public sector (i.e., Union Government), we must look at the comprehensive picture. The sharp surge in Centre’s capex over the past 18 months or so does not imply higher public sector capex, which is what matters for the economy,” said a report by Motilal Oswal.

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