Revival of Private Capex to be the Defining Trend

Expectations of Accelerating Private Corporate Investments in 2024: A Boon for Investors

Source and Citation: Originally reported by KUMAR MANGALAM BIRLA, ET Bureau, Jan 01, 2024

Layman’s Explanation

The article discusses positive indicators for India’s economic resurgence in 2024, such as a projected 7%+ GDP growth, robust equity markets, and improved financial metrics. Notably, it predicts a revival in private corporate capital investments or capital expenditure (capex) across various sectors. While large conglomerates have already been active in this space, the expectation is that smaller and mid-sized companies will also join the private capex upswing. This is encouraged by business-friendly reforms, representing a defining trend for 2024. The broad revival of corporate investments is anticipated to stimulate job creation, innovation, and sustained economic growth over several years.

Impact on Retail Investors

Recommendations

1. Earnings Visibility: Confirmation of private capex revival implies enhanced earnings visibility across industries.
2. Sectoral Focus: Sectors like capital goods, infrastructure, housing, banking, cement, and commercial vehicles are expected to benefit as corporate capacity expansion and growth projects increase.
3. Technology Spending: Improved technology spending is likely to benefit IT services and related sectors.
4. Government Spending: Stocks and sectors linked to government spending may receive a boost if state capex budgets rise.
5. Global Outlook: Export-oriented sectors like IT services may gain if the global growth outlook improves with increased corporate investments.

Cautionary Note

1. Monitor Progress: Investors are advised to closely track progress and avoid premature speculation. Ground-level capex ordering momentum and execution trends should be monitored for evidence of an uptrend.

Impact on Industries

Sectoral Considerations

• Manufacturing Industries: Direct upside is expected as capacity expands to meet post-pandemic demand in sectors such as autos, durables, chemicals, and pharmaceuticals.
• Infrastructure Build-Out: Infrastructure sectors, including EPC contractors, steel, cement, and allied sectors, benefit from continued projects in roads, ports, and airports.
• Technology Investments: IT services majors, communications equipment, and telecom service providers benefit from increased technology investments.
• Real Estate and Hospitality: Commercial real estate and hospitality may see gains as corporate occupancy rises with a return to office trends.

Challenges

1. Consolidation Risks: Weaker players unable to fund expansion may face consolidation, while funding risks persist for over-leveraged small firms.

Long-Term Benefits & Negatives

Benefits

1. GDP Growth Sustainability: Broad-based private capex revival supports GDP growth sustainability and generates employment opportunities.
2. Global Competitiveness: New-age capacities in strategic sectors, such as electronics, solar equipment, advanced chemistry, and EVs, enhance global competitiveness.
3. Profitability and Earnings Compounding: Confidence in enduring growth runways supports sustained capital investments, driving earnings compounding.

Risks

1. Funding Access for Small Firms: Lack of funding access for small firms poses risks of industry concentration in the hands of well-funded giants.
2. Rising Interest Rates: Highly leveraged players may face viability constraints if rising interest rates are not astutely managed during capex funding life-cycles.

Short-Term Benefits & Negatives

Benefits

1. Optimism and Improved Sentiment: Initial private capex announcements, improved lending appetite by banks, and rising capital goods order inflows support investor sentiment.
2. Sectoral Support: Sectors related to capex, such as capital goods and infrastructure, receive specific support.

Risks

1. On-Ground Execution Challenges: Monitoring actual project commissioning data is crucial to overcome on-ground execution challenges, including land acquisition, environmental rules, funding access, and raw material linkages.
2. Global Economic Slowdown: A sharp demand slowdown in key markets globally due to high inflation and interest rates can disrupt investment decisions and lead to delays.

In summary, the anticipation of accelerating private corporate investments in 2024 is seen as a positive trend for India’s economic growth. Retail investors are advised to focus on sectors poised to benefit from this revival while closely monitoring progress and being cautious about premature speculation. The impact spans various industries, and the long-term benefits include sustained GDP growth, job creation, and enhanced global competitiveness. However, potential risks, including funding challenges for small firms and the impact of rising interest rates, should be carefully considered.

Potential Gainers & Losers from Revived Private Capex in India

Indian Companies:

Gainers:

• Capital Goods Companies: Increased investment across sectors will boost demand for machinery, equipment, and engineering services. Companies like Larsen & Toubro Ltd (L&T), Bharat Heavy Electricals Ltd (BHEL), and ABB India Ltd (ABB) could see increased orders and revenue growth.
• Building Materials and Construction Companies: Rising infrastructure spending and private construction activity will benefit cement, steel, and construction companies like ACC Ltd (ACC), Ambuja Cements Ltd (AMBUJACEM), Tata Steel Ltd (TATASTEEL), and UltraTech Cement Ltd (ULTRACEMCO).
• Financials: Increased economic activity and loan demand from businesses will benefit banks like HDFC Bank Ltd (HDFCBANK), ICICI Bank Ltd (ICICIBANK), and non-banking financial companies (NBFCs) like Bajaj Finance Ltd (BAJAJFINANCE).
• Technology and Automation Companies: Increased focus on efficiency and digitalization in various sectors due to rising investment could benefit IT giants like Infosys Ltd (INFY) and Tata Consultancy Services Ltd (TCS) and automation technology providers like Siemens India Ltd (SIEMENS).
• Renewable Energy Companies: Increased focus on sustainable development and energy security could boost renewables like solar and wind, benefiting companies like Adani Green Energy Ltd (ADANIGREEN) and Suzlon Energy Ltd (SUZLON).

Losers:

• Companies Reliant on Imports: Increased local manufacturing due to private capex could reduce demand for imported raw materials and finished goods, potentially impacting companies in sectors like electronics and pharmaceuticals that rely heavily on imports.
• Public Sector Enterprises (PSEs): Continued privatization drive could lead to job losses and market share decline for some PSEs, potentially impacting employee morale and sentiment.
• Small and Medium-sized Enterprises (SMEs): Increased competition from larger, well-funded companies with increased investment could pose challenges for smaller businesses, particularly those struggling with access to capital and technology.
• Companies Focused Solely on Government Contracts: Continued focus on private investment and reduced reliance on government spending could impact companies solely reliant on government contracts in certain sectors like infrastructure and construction.

Global Companies:

Gainers:

• Multinational Corporations (MNCs): A larger Indian market with higher investment and infrastructure development will offer significant growth opportunities for global companies across various sectors like technology, infrastructure, and capital goods.
• Foreign Investors: Increased economic stability and growth prospects could attract foreign direct investment (FDI) into India, benefiting global asset management firms and investment banks.
• Companies Involved in India’s Infrastructure Development: Global engineering and construction companies with expertise in building infrastructure projects could benefit from India’s continued focus on infrastructure development.

Losers:

• Global companies competing with Indian firms: Indian companies becoming more competitive due to increased investment and technology adoption could impact companies from countries with similar export products in sectors like manufacturing and technology.
• Global companies reliant on government contracts in India: Continued focus on private investment and reduced reliance on government spending could impact global companies relying on government contracts in certain sectors.

Market Sentiment:

The news of revived private capex is likely to be met with positive sentiment in both domestic and international markets. Increased investment opportunities, a growing and consuming middle class, and a stable economic environment could attract investors and boost Indian stocks. However, some sectors and companies may face challenges due to increased competition, global economic fluctuations, and the changing Indian business landscape.

Investors should conduct further research and due diligence based on their specific risk tolerance and investment goals before making any investment decisions based on this information.