Most steel companies have leverage headroom for capex needs: HSBC’s Amitabh Malhotra

Despite the rising cost of capital globally, the capex plans of India’s metals and cement companies will not be greatly impacted, Amitabh Malhotra, global banking head of HSBC India told Deborshi Chaki in an interview. Malhotra also outlined the factors that will drive deal activity and consolidation in key sectors. Edited excerpts:

Do you expect deal activity in the metals sector to sustain?

The straight answer is, yes. There is a change in the industry from an end-user perspective due to factors like the advent of electric vehicles, government’s infrastructure push, and rising consumer electronics sales, among others. This is driving deal activity in the metals industry, particularly in steel, nickel, and aluminium. Companies are seeking the lowest cost of power consumption while complying with ESG norms and this leaves little room for greenfield capex and hence consolidation is a preferred route.How is the relatively high cost of capital likely to impact the growth of Indian cement and steel companies?
For most players, we generally see the internal cash flows funding the growth capex, along with debt. Only a few cement companies have gone for new equity raises in the recent past. The cost of debt is certainly critical as these players would be 2-5x leveraged on a net debt/Ebitda basis, barring a few which are net-cash positive. Nearly all major steel companies, on the other hand, are expanding capacity and have leverage headroom to fund it.

Beyond metals, which other sectors are driving deal activity?
We are seeing a lot of traction on power and renewables, infrastructure, healthcare, and industrials. Renewables is one of the most active sectors right now. The government’s target of 500 GW renewable capacity by 2030 has attracted a lot of foreign capital into India because no other market offers this level of scale. There is still a very large pool of capital waiting to enter India’s renewables. Similarly, marquee investors are finding the long-term infrastructure growth story in India very promising, and the capital flow across sectors like roads and airports is seeinig interest. The infrastructure and monetisation pipelines announced by the government offer a multi-billion-dollar opportunity to global investors.

What kind of fundraising activity will take the centre stage for Indian manufacturing companies in the industrial goods sector?
The industrial sector is seeing heightened activity and engagement as domestic and international companies look at India’s potential to become a global manufacturing hub for certain sectors over and above meeting growing domestic consumption. As the global supply chain gets recalibrated, we certainly expect organic investments to grow, but we also expect private equity investments in the space to ramp up as Indian promoters look to scale their businesses and access outside capital for that. We also expect to see some joint ventures between Indian and foreign strategic partners in this space.