Introduction

An ET Bureau article dated December 7, 2023 quotes Confederation of Indian Industry (CII) President R. Dinesh as saying private investments are likely to pickup in the second half of 2023-24 fiscal year. He cites higher capacity utilization and broad-based investments across infrastructure and services sectors.

Analysis for Layman

The industry lobby group CII has said based on their member company surveys, private corporate investments across industrial and service sectors like real estate and hotels will increase going forward compared to the first half of the financial year. This ties in with official data showing robust growth in overall investments last quarter. CII feels this business investment momentum will continue and support around 6.8% GDP growth next year.

Original Analysis

The positive outlook on private corporate investments by an influential industry body is reassuring for equity investors specifically. Broader participation from real estate, hotels and not just traditional infrastructure industries is a healthy sign of demand recovery and corporate earnings upside potential.

If large firms across sectors commence previously stalled capacity expansion projects, it portends well for job creation and structurally higher capital formation going forward. The government should use this encouraging momentum as an opportunity to expedite reforms that unlock private investments at an economy-wide level.

Specific sectors likely to benefit from robust corporate investment plans over the next 3-5 years include capital goods, construction & engineering, cement, metals, real estate, banking, and allied business services segments. Auto and consumer goods could also witness a gradual demand fillip.

Impact on Retail Investors

Retail equity investors must focus on quality names across capital goods, materials, and real estate sectors that have strong market presence, manageable debt levels, a record of solid operational execution, and are key beneficiaries of the private investment upcycle.

Banking sector stocks may witness improved credit growth and asset quality metrics as working capital and project financing requirements pick up. But be selective by analyzing core financial strength.

IPO investors must view over-optimistic growth projections amidst peak business cycle conditions with caution. Favor stocks trading at reasonable valuations with a long runway for growth.

Impact on Industries

CAPEX linked sectors like capital goods/engineering (L&T, BHEL), cement (Ultratech), metals & mining (Tata Steel, JSW Steel), construction (Sobha) to see order book visibility and profitability rise as corporate investments pick up.

Banking sector to benefit from likely improvement in credit growth and corporate lending but asset quality issues may resurface in some weaker names once business growth slows.

Real estate, hospitality firms to gain as corporate investments have a multiplier effect on allied services sectors with a lag effect. But high inflation remains a risk.

Long Term Benefits

Higher private investments over the next 3-5 years to result in higher economy-wide productivity and sustainably stronger job creation across both blue and white-collar roles.

New capacity creation after several years of slow growth in organic corporate investments bodes well for long term structural improvement in competitiveness of Indian manufacturing.

Gradual expansion of bank credit growth in a fundamentally strong investment-led cycle to support financial system stability over the long run.

Short Term Risks

Investments driven by peak global liquidity and transient domestic demand may face roadblocks or slowdown once global recession risks heighten and domestic consumption regresses to mean.

Commencement of large infrastructure, metals, and cement projects amidst high rates cycle poses risks of delay, cost overruns which may disappoint investors expecting quick growth turnaround.

Excessive euphoria amidst strong capacity utilization data may result in reckless commitment of balance sheet and higher bad loans later for the zealous banks and NBFCs.

Companies Likely to Gain

Larsen & Toubro, Ultratech Cement, Shree Cement, Tata Motors, Thermax, Cummins India, BHEL, Havells, Sobha Limited

Companies Likely to Lose

Page Industries, Dabur India, Pidilite Industries, HDFC Bank, Bajaj Finance, MRF Tyres

Additional Insight

Sustainability of growth turnaround and private investments hinges on maintaining predictability around policy environment and interest rate trajectory over the next few years.

Conclusion

The CII survey findings on upbeat corporate investment outlook ties in with the government’s structural reforms agenda to kickstart a long pending private capital expenditure cycle. Retail investors in equities can take exposure to likely beneficiaries but be watchful of project execution risks and asset quality issues in highly levered banks/NBFCs.

Gera, Ishaan and Seth Sharma, Yogima. (2023, December 7). Private Investments Likely to Gain Pace in H2: CII President. The Economic Times.