How do you see 2021 for the infrastructure sector, especially against the backdrop of COVID-19 and an ailing economy? Which pockets will see faster recovery and which will test investors' patience?
Most investors are cautious about the capex cycle since the government accounts for the lion's share of capex spending and COVID-19 pandemic has hit its revenues significantly. Further, divestment proceeds have also been significantly lower than estimated. However, given the circumstances, the central government has done well on this front as central capital expenditure has seen growth of about 5 per cent for the period January-November 2020 on a YoY basis. State expenditure may take more time to recover, while multilateral funded projects should continue to progress better. Overall, we can safely say that the capex-spend bottom is largely behind and we would probably do much better than 15-20 per cent decline for infrastructure spending that many investors would have estimated at the start of the pandemic.
At a macro level, we believe that the government would continue with infrastructure-led development at one end and support the lower end of the strata with direct transfer schemes at the other. The focus on infrastructure would remain high, given its multiplier effect on the economy and job-creation potential. For the medium term, the focus on infrastructure would be driven by National Infrastructure Pipeline (NIP) projects, whereby the government has identified projects worth Rs 111 trillion to be spent over FY20-25.
With the COVID-19 pandemic impacting near-term spends, which were expected to be about Rs 21-22 trillion annually, we can look at 12-15 per cent CAGR over the next three-four years.
Infrastructure-related spends should also benefit from the government's recently introduced production-linked incentive (PLI) schemes. The government recently announced the extension of PLI scheme to 10 sectors other than mobile phones, taking the total PLI incentives allocation to Rs 1.9 trillion. Assuming the same incentive-to-capex ratio as the mobile-phone PLI scheme, new schemes could translate into an incremental capex of Rs 397 billion and about Rs 500 billion including mobile phones.
Another area to keep a focus on would be the real-estate cycle. We have seen encouraging sales trends for last three to five months. If this trend continues for a few more quarters, we can see broader recovery across many industries like steel, cement, electricals, tiles, building materials, etc., which can also potentially revive private capex.
Ample liquidity in the system (running in excess of Rs 5 trillion), low interest rates and resolution of stressed assets in the banking system can support a revival in infrastructure spending.
Overall, we expect growth of 12-15 per cent CAGR in infrastructure-related spends over the next three-four years and the revival would be led by the central government and central PSUs followed by state expenditure, while private capex can take another year or so to meaningfully grow as the utilisation level improves across key industries like steel, cement, autos, oil and gas, etc.
In terms of sub sectors, the key areas of spend should be railways (including high-speed rail, dedicated freight corridors and metros), roads, water (including irrigation projects, Nal se Jal and Namami Gange schemes), power T&D, renewable and defence. Traditional power capex and that on oil and gas, especially upstream, can be somewhat subdued, while we expect private capex for now to be PLI-led and more focused on efficiency improvement and brownfield expansion.
This interview was conducted in January 2021 and first appeared in the February 2021 issue of Wealth Insight