The report by Elara Securities said that the election season is leading to order inflow momentum for large projects especially in capital goods, railways as well as the roads sectors.
With the elections season in the next six months, there has been a moderation in new capex activity, as per new projects data released by Elara Securities. The report added that the election season is leading to order inflow momentum for large projects especially in capital goods, railways as well as the roads sectors. Management commentary from companies post Q2FY24 results corroborates the loss in pace in order awarding.
“Within our capital goods coverage, growth in inflows decelerated to 39 per cent in Q2FY24 from 62 per cent in Q1FY24 and 65 per cent in Q4FY23. Likewise, in the infrastructure space, for the companies under review, cumulative order inflow rose 49 per cent YoY in H1FY24. However, if we were to exclude L&T, which saw large international order inflows, aggregate order inflow declined 27 per cent YoY. Likewise, while the Ministry of Roads & Highways has spent 64 per cent of budgetary allocation up to October 2023, new project awarding activity has fallen 48 per cent YoY to 2,595 km, highlighting that focus has shifted toward completing existing projects,” it said.
Shifting focus toward elections
With significant amount of spending lined up in rural India and the agriculture sector, such as likely hike in PM Kisan amount and higher MGNREGA allocation, as well taking into account the freebies announced in Assembly Elections of five states where voters will decide the next government (Rajasthan, Madhya Pradesh, Telangana, Chhattisgarh and Mizoram), focus is shifting to election preparedness and related spending. This is delaying the impetus toward new ordering activity by the government and wait-and-watch approach by the private sector, noted Elara Securities report. “We expect further moderation in order inflows momentum, led by infrastructure spending in railways and metros, power T&D, renewables, wastewater treatment, and the civil sector,” it said.
Strong water capex
According to Elara Securities, one sector that may buck the trend is the water sector. Since spending on schemes related to last-mile delivery, such as Nal Se Jal Scheme, which is under the Jal Shakti Ministry, helps in enhancing positive sentiments prior to elections, spending in Jal Shakti is expected to remain in the fast lane in the run-up to the elections, bucking the likely slowdown in other infra space. Moreover, it added, since the Jal Jeevan Mission is targeted to be completed by end-CY24, execution may remain healthy through FY25. This fiscal too, the Jal Shakti Ministry has spent 21 per cent of BE April-September vs an average of 19.2 per cent during April-September FY21-23.
Govt capex spending led by roads and railways
Data for the Central government spending to date shows defense spending was in the slow lane this financial year (37.1 per cent of BE during April-September FY24 vs an average of 42 per cent during April-September FY21-23) despite making up in awarding late into the last fiscal year. Roads and railways spending to date has been in line with the trends during the past three years.
Earlier, it has been witnessed that in the run-up to the 2019 Lok Sabha elections, there was a sizeable slowdown in capital spending by the Central government on roads and railways. The trend continued until July 2019. However, once the final Budget for the year was presented, the pace picked up again.
Private capex in wait-and-watch amid uncertainty
The new project announcements by the private sector as per CMIE data contracted 71 per cent YoY in Q2FY24 in the quarter under consideration. This is the first sharp decline after nine quarters of good growth since COVID-19. Although the stock of projects remains healthy, incremental additions have moderated, the report stated.
“Notwithstanding the expected slowdown over next 2-3 quarters in order awarding, we remain structurally positive on capex. Apart from roads, the opportunity pipeline continues to be healthy in metros, railways, tunnels, airports, mining, the Jal Jeevan Mission and Power,” Elara Securities stated. “We estimate this window of opportunity at ~Rs 99.52tn over the next decade,” it added.
Source:financialexpress.com