BackFirms in no hurry for capacity expansion
Many continue to see their existing facilities remain underutilized despite expectations of 7.8% growth this fiscal
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Mumbai: Indian firms may be in no hurry to invest in fresh capacities despite expectations of a near 8% growth in the current fiscal year, as many continue to see their existing facilities remain underutilized.
A pickup in the private sector investment cycle is seen as a crucial follow-up to a step-up in the public sector investments announced in the budget, but if capacity utilization indicators are anything to go by, the private sector does not need to add capacity immediately.
A forward-looking survey conducted by the Reserve Bank of India (RBI) showed that 79% of respondents felt that installed capacity was adequate to meet demand in the next six months. Of the rest, 14% said that capacity was “more than adequate" to meet the anticipated demand in the next six months.
The results of the survey were released on 7 April.
The survey further showed that 63.7% of respondents expect no change in the capacity utilization levels in the April-June 2015 quarter, and 75% expect the level of utilization to remain “normal" when compared to the last four quarters, when more than a quarter of their capacity remained unused.
“Capacity utilization is definitely low; no doubt about it. It is below average if you look at the last four years, particularly in manufacturing sectors like steel, cement and two-wheelers. There was some improvement last year in cars and utility-vehicles segment as compared to the previous year. But those are small and below the four-year average," said D.K. Joshi, chief economist at rating agency Crisil Ltd.
Separate data put out by RBI showed that capacity utilization in the December 2014 quarter was steady at 71.7% compared to 71.8% in the preceding quarter and lower than the 75.1% level in the fourth quarter of 2013-14.
The data comes with a one-quarter lag.
India’s economy is expected to grow at 7.8% in 2015-16 based on a new series of gross domestic product (GDP) data released by the government earlier this year, said RBI last week.
Based on this series, growth in 2014-15 was at 7.5%, suggesting the incremental pickup in growth, and hence demand, in the new fiscal year may not be significant.
To be sure, investments made now will take time to come on stream and companies may start to plan ahead in anticipation of a steady improvement in the economy over the next few years.
Some indications to this effect came through in the recent data put out by the Centre For Monitoring Indian Economy Pvt. Ltd, (CMIE), which tracks industrial trends closely.
New investment proposals rose by 88% in the quarter ended March compared to the previous year. This was the third consecutive quarter that saw strong year-on-year growth in new investment proposals, although the growth came on a low base of last year when there were hardly any fresh investments being planned.
There was a caveat to that data. Sequentially, on a quarter-on-quarter basis, new investments slumped in the March 2015 quarter to ₹ 1.9 trillion, after witnessing an inflow of over ₹ 2.8 trillion in the preceding two quarters.
“Evidence regarding a pickup in investments is still weak. While there was a pickup in the quarters ending September and December 2014, this was not sustained in the March 2015 quarter. New investment proposals in the March 2015 quarter were lower than it was in September and December quarters. If we take into consideration the skewed geographical distribution of these new proposals, then the picture turns even more bleak," said Mahesh Vyas, managing director of CMIE.
According to a separate report by CMIE, 40% of new investment proposals in the January-March 2015 quarter came from Gujarat, where the annual Vibrant Gujarat summit was held during the quarter.
Vyas added that the low capacity utilization data from the RBI cited above provides an explanation for the continued weakness in new investment plans.
“Industry will not find new investment proposals attractive till they don’t fully utilize their existing capacities. Further, the poor expectations of capacity utilization suggests a gradual erosion of the euphoria that had built up around the new government," said Vyas.
“There was a need to temper these unrealistic expectations and the RBI survey suggests that this is already happening," he added.
To be sure, capacity utilization differs across sectors and firms. Some segments, such as cars and heavy commercial vehicles, may have seen a pickup due to improved volumes, while others, such as two-wheelers, have seen sales falling due to weakness in rural markets. “There is no visible pickup in the demand environment in 4QFY15. The gap between urban and rural growth continues to shrink, with rural growth persistently moderating (unseasonal rains to further impact rural demand)," HDFC Securities Ltd said in a note dated 9 April referring to the consumer goods sector.
“There is no rise in income and rural wages have not improved much. There is not enough fiscal stimulus and inter-state taxes are still a challenge. So, there are very few levers to push the market," said Crisil’s Joshi, adding that it is difficult for companies to make investment decisions and most of them have remained cautious.
M.V.S. Seshagiri Rao, joint managing director and group chief financial officer at JSW Steel Ltd, adds that in some sectors, increasing imports and declining exports are also impacting utilization levels.
“There are four reasons behind poor capacity utilization. Non-availability of raw materials and poor demand pickup are primary reasons. Also, flooding imports and decline in exports are also hurting capacity utilization," said Rao.
“The total installed capacity for crude steel is around 115 million tonnes per annum, but the country is producing only 85 million tonnes," he said, adding that capacity utilization can vary from company to company.
“Some companies will have extremely low capacity utilization at 30% while some may have high 80s," Rao said.
bidya.s@livemint.com
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