Home >industry >manufacturing >Recovery in capex still far away

Mumbai: A revival in private sector capital expenditure (capex) is unlikely to happen in 2016 as firms continue to operate at low capacity utilization levels and await clearer signals of a recovery in demand.

The private sector capex cycle revival is seen as critical to sustaining a recovery in the economy which has so far been supported by pick-up in urban consumption and public spending.

In the mid-year economic review released Friday, the government said the economy will expand 7%-7.5% this fiscal year, slower than the 8-8.5% forecast in February, because of weak demand and sluggish corporate spending.

“People are only doing what is mandatory rather than discretionary," said R. Shankar Raman, whole-time director and chief financial officer at Larsen and Toubro Ltd (L&T).

L&T, India’s largest engineering and construction company, a corporate proxy for the broader economy, expects private capex to remain sluggish in the near term until existing capacities are fully utilized.

According to the Reserve Bank of India’s (RBI) capacity utilization survey conducted in September, utilization levels were at near 71% in the first quarter of the current fiscal.

Data for the second quarter has not been released.

“It all depends on how quickly they are able to fill up their existing capacity, only then will they talk about investment," said Raman.

That seems to be the majority view.

In a 8 December report, Kotak Institutional Equities, which analysed capex plans of 130 large companies, said that capex for fiscal year 2017 may actually decline by 15%. This would be the third year of declines after a 3.9% and 4.1% drop in fiscal 2015 and fiscal 2016, respectively, showed data compiled by the brokerage house.

“Most corporates are looking at completing projects that are under construction and focusing on reducing leverage through multiple options than looking at fresh capital expenditure," stated the report.

The problem is worse in some industries than others.

Utilities, metals and mining, and telecom are some of the sectors where capex next year may be lower than this year. Cement, too, falls in that category.

“Demand has not picked up in a big way. Until that happens, companies are not confident enough to go ahead with their capital expenditure plans. That revival is still far away," said an executive from a cement company who did not wish to be identified. He added that while small investments in grinding capacity are being made, companies are holding off on large investment plans.

As of September, the country’s cement utilization rate was at 68%.

There is another factor at play: the availability of cheap stressed assets in many sectors, which stronger firms can scoop up to expand their market share without investing time and capital in greenfield projects.

“With large number of cement plants up for sale, buyouts are a better option over greenfield expansions," said the executive cited above.

For instance, Anil Ambani-led Reliance Infrastructure Ltd plans to exit its 5.6 million tonne cement capacity. Several smaller cement plants are also up for sale in south India.

That’s true for the steel sector as well.

Banks have converted their debt into equity in a number of steel firms under the strategic debt restructuring (SDR) scheme for distressed assets. These assets are all up for sale.

As such, there is no clear visibility on how quickly private capex will revive. “Any pick-up in private capex will be moderate and will only happen in the second half of next fiscal, if at all," said Crisil in a report Wednesday.

In the meantime, industry continues to look to the government to lead the cycle.

Public spending will be the key driver, said Sunil Mathur, managing director of engineering firm Siemens India Ltd, adding public spending has started in select sectors such as railways, transmission and distribution.

“But it has to pick up in other areas. And when it picks up in the other areas, private spending will follow at some point," Mathur said.

Raman of L&T said that a lot of things need to fall in place before private capex revives.

“We all hope revival will happen sooner than later, but whether it’s going to take two quarters or four quarters is hard to tell. And I think we will have to keep watching it closely for upticks. Some sectors might revive faster than others; so for companies like us, which are broad-based, the benefit of revival will come. But it is tough to be precise," said Raman.

A 9 December report from brokerage JM Financial Institutional Securities Pvt. Ltd, highlighted that there are no indications of a recovery in capex cycle in sectors such as capital goods which tend to benefit from a pickup in capex. “We analysed quarterly trends for 43 industrial companies to gauge signs of an industrial recovery. Excluding Bharat Heavy Electricals Ltd (BHEL), we saw weakening sales momentum, largely due to softening exports, weak execution in transmission and EPC (engineering, procurement and construction), and slowing sales in small-ticket industrial products (pumps, engines, machine tools, abrasives, bearings, etc.)," the report stated.

The brokerage added that companies catering to a diverse set of industries indicated that demand improvement is slower than expectations, thus pushing revival hopes to the second half of next fiscal. “Additionally, the recent quarter saw weakening of inquiries from international regions amidst increased competition as the Chinese yuan continued to weaken against the rupee," it added.


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