BackWhere’s the capex cycle in this downturn?
Where’s the capex cycle in this downturn?
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The chart shows the percentage change in gross block every year since 1996 for all companies listed on the Bombay Stock Exchange. Indian companies had gone on a capital expansion binge in the mid-1990s, seen in the chart from the 22.15% rise in gross block in 1995-96. As first the Asian crisis and then the dotcom bust hit the economy, the rate of growth faltered and excess capacity was created in many industries, leading to a rash of bad loans for banks. As the chart shows, the rate of addition to gross block declined almost every year to a low of 6.74% in 2003-04. From 2004 onwards, however, there was a steady rise in capital expenditure, thanks to good economic growth and easier financing conditions. The growth rate fell a bit in 2007-08, but seems to have bounced back smartly in 2008-09.
Growth in “machinery and equipment other than transport equipment" has been a relatively high 11% during April-September. That seems to indicate that investment demand is increasing once again. Indeed, many broking houses are forecasting a good year for the capital goods sector, as companies become more confident and start to expand capacity. As a matter of fact, the BSE Capital Goods index’s trailing price-earnings multiple is as high as 27.
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