Mumbai: Indian companies are likely to spend less on capacity expansion and new projects this year than they did in the last fiscal, in an indication of slowing investment activity in the country.
A Mint analysis shows the ratio of capital expenditure (capex) to sales rose to a five-year average in the year ended March, but experts say that could fall in the current fiscal, driven by cyclical factors, macroeconomic uncertainties on the global as well as domestic front, and policy-induced delays.
This, despite the fact that firms on the benchmark Sensex index have the lowest debt levels in the past five years as on the balance sheets of their domestic operations, which Mint analysed.
“Much of the capex that we saw in the past fiscal were projects that were deferred in (fiscal 2010,” said Dhananjay Sinha, a strategist and economist at Centrum Broking Pvt. Ltd. “This year, I expect the capex-sales ratio to fall below its historical average.”
The capex-sales ratio better measures the sustainability of capital spending over a period of time as it also takes into account more variables and the ability of firms to finance capex.
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Such a ratio of BSE-500 companies—which constitute 93.5% of market capitalization on the Bombay Stock Exchange (BSE)—rose one basis point (or 12.5%) to 0.09, in line with its five-year average, in 2011. A basis point is one-hundredth of a percentage point.
The capex-sales ratio of the 30-share Sensex firms rose one basis point (or 10%) to 0.11, one basis point (or 8.3%) shy of its five-year average of 0.12. On a consolidated basis, the Sensex capex-sales ratio of 14% was in line with its five-year average.
The pick-up in capex in 2010-11 was broad-based, with most sectors seeing a rise in the capex-sales ratio as companies that had deferred capex plans in 2010 initiated projects on the back of revenue growth of at least 20% and economic growth of 8.5%.
In fiscal 2011, the capex of Sensex firms grew 23% to Rs 91,674 crore and the capex of firms in the BSE-500 grew 26% to Rs 2.43 trillion on a stand-alone basis, according to data from Capitaline. Banks and financial institutions were excluded from the Mint balance sheet analysis.
The total worth of new projects announced in the three months to September was at the second lowest level in the past five years, according to Centre for Monitoring Indian Economy (CMIE) data.
Only 770 projects were announced in the September quarter, making it the first quarter in the last two years when less than 1,000 projects were announced, the latest CMIE bulletin said. Actual capex spend has fallen 45% in the first half of the fiscal compared with a year ago.
Besides, most of the capex this year has been on existing plants rather than new projects, according to a 6 October report by Standard Chartered Securities (India) Ltd.
In another indication of a slowdown in the capex cycle, Larsen and Toubro Ltd (L&T), India’s largest engineering and construction company, slashed its order inflows estimate for the year to 5%, down from an earlier forecast of 15%-20%.
The company, on Friday blamed a slowdown in government orders, subdued investment sentiment, heightened competition, and consequently, a lower strike rate for winning orders for the lower growth.
The last time L&T saw single-digit growth in orders was in fiscal 2002.
“My sense is that the investment scenario as a whole has slowed down. I think people are re-evaluating prospects given the fact that most of the world is dealing with ways to combat recession; they’re trying to stay afloat with a 1-1.5% growth scenario,” said R. Shankar Raman, chief financial officer, L&T. “I don’t see an immediate pick-up (in the capex cycle) in the next three months. Maybe in the later part of the fiscal, you could see some improvement.”
“It is unlikely that India will witness a sharp pick-up in corporate investment anytime soon, which is likely to dampen growth prospects this fiscal,” warned Sajjid Chinoy, an economist at JP Morgan India Pvt. Ltd.
Capacity utilization of firms is at a three-year-high of 77%, according to the latest quarterly review of the macroeconomy by the Reserve Bank of India, and leverage levels for Sensex firms are at the lowest levels in at least five years—a sure sign of risk aversion.
The debt-equity ratio, the measure of leverage, of Sensex companies fell to 60% in fiscal 2011, compared with a five-year average of 70%. In contrast, the debt-to-equity ratio for BSE-500 companies was at 82%, three percentage points higher compared with its five-year average.
Free cash flows of Sensex firms at the consolidated level were 52% lower than the five year average of Rs 16,947.76 crore in the fiscal ended 31 March, but on a stand-alone basis, this was 31% higher than the average at Rs 57,805.73 crore.
Free cash flow is a measure of financial performance calculated as operating cash flow minus capital expenditure. It represents the cash a company is able to generate after laying out the money required to maintain or expand its asset base.
The contrasting picture is perhaps best explained by the fact that Sensex companies, by virtue of their size, have more overseas units in which they have been investing heavily.
Fears of a global growth slowdown owing to a European sovereign debt crisis, policy inaction and a worsening domestic economy that faces rising inflation, high interest rates and a slower growth rate in fiscal 2012 are likely to lower capex, analysts said.
High fuel prices, inflation and rising interest rates were the biggest deterrents to the expansion of corporate capex plans, according to an August survey of companies by Morgan Stanley.
A part of the downturn in capex is also cyclical, said Tirthankar Patnaik, strategist at Religare Capital Markets Ltd. Sectors such as telecom, power and steel, which were among the big spenders on capex in fiscal 2011, are unlikely to spend much this year, he said.
The capex-sales ratio of steel companies at 20% was higher than their five-year average, while that of auto companies at 5% was lower than its five-year average.
“Much of the capacity expansion in auto firms is happening among the unlisted players such as Ford and Hyundai,” said Patnaik.
Ashwin Ramarathinam and Ravindra Sonavane contributed to this story.
Graphic by Sandeep Bhatnagar/Mint