>INDUSTRIALS (KOTAK SECURITIES)

Financial closure data suggest strong capex activity. Financial closures, a leading indicator of capex, reflected surprising strength with yoy growth of 73% (Rs4.2 tn versus Rs2.4 tn) during FY2009. Power dominated (1/3rd of total) with closure of about 25 GW. Capital goods imports data, however, does not corroborate such strength and actual capex may have been postponed. Revival in economic activity combined with strong financial closures underline strong capex outlook for FY2010E and beyond.

Financial closures – a leading indicator reflect surprising strength in capex activity
We highlight that the amount of financial closures achieved by the private sector during FY2009
grew 73% (to Rs4.2 tn from Rs2.4 tn) during FY2008. This reflects surprising strength versus a
wide perception of weak credit markets during FY2009. We believe that financial closure activity reflects strength of corporate capex activity in the country and is a leading indicator of likely capital expenditure activity. Financial closure data is provided by Reserve Bank of India (RBI) on an annual basis and captures private corporate sector projects achieving financial closure from banks and financial institutions. This data does not include projects of public sector entities such as NTPC and does not include direct government financed projects.

Infrastructure segment dominates—particularly power, supported by telecom and metal
The power sector contributed to 1/3rd (Rs1,241 bn out of Rs4,223 bn) of all the financial closures. This is reflective of strong generation capacity addition announcements by the private sector in the recent past. Total financial closures would have amounted to about 25 GW of capacity. Telecom sector financial closures during FY2009 (Rs691 bn) were 15X of the financial closures in FY2008 (Rs46 bn), probably contributed by new networks launched by recent entrants as well as the substitution of overseas borrowings by domestic funding. Metals sector financial closures contributed about Rs85 bn during FY2009 versus Rs40 bn during FY2008, possibly explained by financing for ongoing capital expenditure.

Capital goods imports do not corroborate such strength—actual capex may have been postponed: Capital goods imports (an aligned data point) does not corroborate such strength in capex activity as imports declined by 8% (in US$ terms) during FY2009 versus FY2008. Most of the decline was however concentrated in Oct ’08-Mar ‘09 with a 29% decline in those six months versus 42% yoy growth during Apr-Sep ‘08. We believe that despite strong financial closure activity, actual capex may have been postponed in 2HFY09, based on economic conditions prevailing then. RBI data based on phasing schedule of projects as per financial closure suggest likely capex of Rs3.1 tn (22% yoy growth) versus R2.6 tn during FY2008. We believe that despite the potential postponements, strong financial closure activity and a recent revival in economic activity during FY2009 strong support capital expenditure outlook for FY2010E and beyond.

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