Mahesh Nandurkar, India strategist, CLSA
Private investment can be classified into two parts — private corporate investment and private household investment. Given the low-level capacity utilisation, corporate capex recovery is unlikely in the near-term, but we are quite optimistic on household investment. Household capex is nothing but new house construction and is the largest component of the overall capex activity in the economy. Over the last four to five years, while house prices have remained largely unchanged, household incomes have grown by 8-10% each year. Mortgage rates have also reduced from 11% to currently ~8-8.5%. There’s a huge pent-up demand for housing, already reflected in rising rental yields from 2% to 3-4%. We believe that the housing market recovery is around the corner and will be the key driver for private capex revival. This will raise capacity utilisation for industries like cement, steel, and other household products, thereby leading to capex in those industries.
Mahesh Vyas, CEO, CMIE
Industry has sufficient excess capacity at the moment and it would rather see capacity utilisation pick up first, before thinking of creating new capacity. According to RBI, capacity utilisation in the manufacturing sector was less than 72% in Q2FY18. Capacity utilisation was over 80% in FY10, the last time private capex saw a surge. Plant load factor of thermal plants, which used to be ~78% in FY10, was less than 60% in Q3FY18. The expected increase in interest rate and the sustained increase in bond yields suggest that easy money will not be an investment driver in FY19. Domestic demand has not been very robust lately, with near-drought-like conditions (2014 and 2015), followed by disruptions of demonetisation (2016) and GST (2017). This sustained battering has reduced the scope for aggressive demand growth. This shows in the low capacity utilisation and will adversely impact corporate decisions to expand capacity in FY19.