Indian corporates may see 10%-12% capex growth in FY24, says Fitch

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Fitch Ratings on Tuesday said India’s structural demand visibility, supply-side measures and healthier corporate, bank balance sheets are likely to push capex up for the corporate sector over the medium term .

However, a weak global economic outlook, currency pressures and rising interest rate risks may pose risk for the country’s investment demand.

Fitch expects the capex of its rated corporates in the country to continue growing by 10-12 per cent a year over the financial year ended March 2023 (FY23) to FY24. Capex was flat over FY19 to FY21 and grew 16 per cent in FY22.

“We believe the growth opportunities arising from the country’s supply-side policy steps in recent years, domestic corporates focusing more on localisation, and multinationals looking to reduce risk in global supply chains may attract higher private investment in the medium term,” the agency said in a report.

The government reforms such as the goods and services (GST) tax act or the bankruptcy code have been in place for some time, but more recent measures such as a lower corporate tax rate, the production-linked incentive (PLI) schemes and rising state spending on infrastructure may further boost investments.

Indian corporates’ deleveraged balance sheets and improving profitability from FY23 lows improve their ability to invest, it said. In addition, the capex is backed by higher internal accruals, given the lower capex/EBITDA ratio, and is hence more sustainable.

Banks’ falling impaired-loan ratios and credit costs have improved the financial health of the domestic banking sector, which will enable the lenders to support corporates’ funding needs.

The rating agency said the improved activity levels in the country’s manufacturing sector and sustained growth in new orders will also raise corporate capex.

However, the potential cost and currency pressures from commodity prices that remain high and a global economic weaker outlook present risks for the country’s investment demand, as it remains a large net importer of energy and exports around 21 per cent of its output.

The capex outlook may also be tempered by rising interest rates amid inflationary pressures for corporates with a smaller scale or weak financial profile, it said.

The agency further said it expects India’s GDP growth to slow to 6 per cent in FY24 (FY23: 7 per cent FY22: 8.7 per cent), on the back of rising interest rates to tackle inflation and fading post-pandemic demand.

Slower growth may temper investment demand tailwinds from the domestically focused economy, which may affect the spending plans of smaller corporates or those with weak financial profiles.

“We believe high interest rates, along with tight liquidity and ongoing geopolitical tensions, may continue weighing on equity funding options for some corporates in the near term,” it said.

However, the pass-through of lower input costs compared with 2022, generally healthier balance sheets and the secular nature of most capex drivers should mitigate the impact of these pressures on corporates’ capex outlook over the medium term, Fitch said.

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