MOSL: Capital Goods-Private sector capex declines for sixth year in a row-Revival from FY18 as project sanctions by banks surge 92% YoY

​Capital Goods: Private sector capex declines for sixth year in a row; Revival from FY18 as project sanctions by banks surge 92% YoY

• ​Private sector capex at INR1.55t in FY17, down 11% – sixth year of decline: Private sector capex has been declining since FY12, when it peaked at INR3.7t. It has declined to a six-year low of INR1.55t, down 11% in FY17 (Exhibit 1). Interestingly, capex based on projects sanctioned by banks/FIs (excluding ECBs/equity issuances) grew 2% to INR1.25t. Key reasons for low private capex include (a) weak end-market demand, resulting in capacity underutilization, (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 (including bank loans, ECBs, and equity issuances) up 53% to INR2.1t in FY17; sanctions by banks/FIs up 92%: A total of 922 companies obtained project sanctions worth INR2.1t (+53% YoY) versus 700 companies with projects worth INR1.4t in FY16. Interestingly, the projects sanctioned by banks/FIs have risen 92% to INR1.83t in FY17, off a low base in FY16, but the highest since FY13. Project sanctions from banks/FI peaked at INR4.3t in FY10, leading to a fall in capex thereafter (Exhibit 2). With a sharp revival seen in sanctions in FY17, we expect private capex to also start improving from FY18.
  
• Share of Power sector in projects sanctioned dips to 45% in FY17 (57% in FY16); share of Construction surges to 12% (2% in FY16): The share of Power sector fell to 45% (primarily renewables, in our view) on a lower share of coal-fired plants. Construction (12% share v/s 2% in FY16), Roads (7% share; flat YoY), Airports/Ports (6% share v/s 2.4% in FY16), Water (4% share; flat YoY), Metals (5% share v/s 1% in FY16), Transport Equipment (4% share v/s 2.5% in FY16) and Textiles (4% share; flat YoY) together contributed another 41% of projects sanctioned.