Real estateHigher interest rates should not prevent promoters from borrowing because investment returns are likely to be good, thanks to better infrastructure facilities.

The chatter about capital expenditures increases with meaningful spending expected over the next four to six quarters. CRISIL estimates that investments in the industry could rise 30% in fiscal year 22-24, driven by a boosted dose of the PLI (Production Linked Incentive) plan. CRISIL believes that PLI, across 13 segments, can generate a capital expenditure of Rs 2.2 crore over 3-4 years. In fact, although capacity utilization is less than 70%, there are a combination of factors that have paved the way for some meaningful capital expenditures.

Chief among these factors is the sharp and somewhat unexpected rise in residential real estate. Thanks to lifestyle changes, stagnant asset prices, and falling interest rates, the demand for homes has seen an unprecedented rise after the second wave, depleting stocks in many markets. An analysis by Jefferies reveals that beyond the long discount cycle between 2012/13 and 2020/2021 there is an increase in the cycle with a marked increase in volumes and prices. The upside in real estate – with its multiple links – could cause makers of a range of products to rethink expansion plans. The second big factor that will start capital spending is the rise of the digital economy.

The e-commerce and start-up sectors – funded with foreign capital – provide jobs in large numbers, for both white and blue-collar workers. This creates purchasing power and will boost consumer demand which has waned somewhat for a few years now. The IT sector continues to hire in large numbers. In fact, the great rush to buy new cars is a testament to the purchasing power.

To be sure, companies may be waiting for a better view on demand. But many of them started. Several steelmakers, for example, have announced expansion plans; Capital goods makers also saw orders for electrical equipment, environmental protection and energy conservation. The truth is, companies are in a better position than they have been in years. Cash flow improved in fiscal year ’21 with net profits of a sample of about 2,000 companies increasing by 50%. With a quick recovery, they may be doing almost as well in the current year. Moreover, it is much less effective than it was a year ago.

According to Credit Suisse, the share of debt with an interest cover lower than one has fallen to about 32% (excluding automobiles) over the past four quarters, the best reading in the past seven years. Moreover, the banks are holding up well, with less-than-expected damage to their balance sheets from the pandemic. They will of course be more cautious this time, especially while lending long-term infrastructure projects and even more if the promoters are not able to bring in sufficient capital.

For their part, mid-size business groups – some of which burned their fingers one last time – will likely be crippled by a lack of equity capital for a few more years. As such, it is the larger business groups, such as Tatas and Birlas, that are expected to lead the way with the brownfield expansions. Higher interest rates should not prevent promoters from borrowing because investment returns are likely to be good, thanks to better infrastructure facilities.

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