Mumbai: The annual increase in gross fixed assets of the 400 firms in the Bombay Stock Exchange (BSE) top 500 universe that have published their balance sheets for 2006-07 has increased from around 7% in the first three fiscal years of this decade to about 10% in the past three.

However, the annual capex spending in the mid-1990s at the companies that

High rise: The Bombay Stock Exchange in Mumbai. The annual capex spend by 400 of BSE 500 firms?rose to 10% from 7% in last three years.

According to some analysts, this indicates that the capacity expansion now under way is more sustainable because Indian firms are now more tuned to market demand and have a better gauge of the return on capital employed. Unlike in the mid-1990s, the capex boom is now less likely to be followed by a bust, they say.

“In the 1990s, adding capacity was almost a frenzy. There was a crazy expansion in capex, immediately after the liberalization of our economy. This was disastrous, as the demand was not as high as the industry had predicted," says Apurva Shah, head of research at Prabhudas Lilladher Pvt. Ltd, a domestic brokerage. “Today, there is reasonably good demand visibility and large companies are spending more on improving their infrastructure."

Another major factor that has reduced the annual spending on capacity expansion is the increased role of mergers and acquisitions, says Girish Nadakarni, executive director of capital markets at Mumbai-based Avendus Advisors Pvt Ltd, an investment banking and institutional equity brokerage firm. “Today M&A is considered as the fastest and one?of?the most important ways of expanding a business in India. While, on the other hand, during the 1990s there were very few cases of M&A among the large companies in India."

Also, many large services firms are now part of the BSE 500. These firms don’t need large amounts of fixed assets. The increase in gross fixed ass-ets?will?be?lower for these firms. On the other hand, analysts point out that the current BSE 500 universe also has several retail and telecom firms, which need large amounts of capital expenditure.

Analysts also say the fact that the percentage rise in gross fixed assets is almost half the rate that prevailed in the mid-1990s is an indication that the current boom in capital goods still has legs. “That’s clear from the bulging order books of capital goods companies," says a sector analyst, who did not wish to be named.

The total money spent on capacity expansion by firms in the BSE 500 index was about Rs415,000 crore in the fiscal year 2007 and Rs375,000 crore in FY06 as against Rs126,000 crore in FY96. This base effect has also played a role in this reduced growth in annual spent on capex.

However, many Indian firms have under utilized capacities, argues Nitin A. Khandkar, vice-president of research at Keynote Capitals Ltd. “There is a clear gap between the existing capacity build-up among a large pool of Indian companies and their utilization," he said. “The increase in production is not at the same pace as that of the capacity expansion. As a result, there is a strong chance for a slowdown in capex, in the next two years."

The annual growth in net revenue of firms in the BSE 500 has gone up significantly in the past three years. While, the annual sales growth was around 13% in 2002-03 and 2003-04, around 20% in 2004-05 and 2005-06. During 2006-07, the turnover of these firms was the highest at 25.6%.