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MOSL: CAPITAL GOODS-FY18 private sector capex declines for seventh year in a row

CAPITAL GOODS: FY18 private sector capex declines for seventh year in a row; Project sanctions by banks indicates revival around the corner

 

FY18 private sector capex down 13% YoY at INR1.5t; marks seventh year of decline: Private sector capex, which peaked in FY11 at INR3.7t, has been on a declining trend since the past seven years. And now, during FY18, it hit its lowest level since FY07, declining 13% YoY to INR1.5t (See Exhibit 1). Also, capex based on projects sanctioned by banks/FIs (excluding ECBs/equity issuances) declined 10% YoY to INR1.2t. The decline in private capex can be attributed to (a) weak end-market demand resulting in under-utilization of capacity, (b) high leverage with companies in sectors like steel, power, and infrastructure, which constrains new borrowings and resultant capex, and (c) delays in land acquisition and clearances. 

Projects sanctioned (by banks, ECBs and equity issuances) declines 4% YoY to INR2.0t in FY18 on multi-year high base of FY17: In FY18, 782 companies obtained project sanctions worth INR2.0t (-4% YoY) v/s 922 companies with projects worth INR2.2t in FY17. Projects sanctioned by banks/FIs declined 5% YoY to INR1.72t in FY18, due to a high base in FY17 (1.82t; +92% YoY). Note that project sanctions from banks/FIs peaked in FY10 (INR4.3t), post which there was a subsequent decline in capex (See Exhibit 2). With a sharp revival seen in sanctions since FY17, we expect private capex to see an improvement post general election in FY20. 

Share of Power sector in projects sanctioned dips to 38% in FY18 (45% in FY17); Chemicals and Fertilizers’ rises to 11% (2% in FY17): Share of the Power sector declined to 38% (primarily renewables, in our view) on a lower share of coal-fired plants. Chemicals and Fertilizers (11% share v/s 2% in FY17), Roads, Bridges and Waterways (10% share v/s 7% in FY17), Metals (9.5% v/s 5.0% in FY17), Construction (5% share v/s 12% in FY17), Transport Equipment (4% share v/s 0.5% in FY17) and Textiles (4% share, flat YoY) together contributed another 42% to projects sanctioned.