Strong operating cash flows help companies maintain capex momentum

In terms of sectors, driven mainly by Reliance'’s investments in other businesses, oil refining accounted for the largest capex. (Image: Pixabay)
In terms of sectors, driven mainly by Reliance'’s investments in other businesses, oil refining accounted for the largest capex. (Image: Pixabay)

Summary

  • Among the top spenders are Reliance, followed by Bharti Airtel, ONGC, Tata Motors and NTPC
  • Current economic outlook provides support to investment plans, but future capex must continue to be backed by internal cash

Corporate investments in fixed assets remained robust during FY24, despite the hike in interest rates, backed by their cash flows. A Mint analysis of consolidated financials of over 1,800 companies showed that the cash flow for purchase or creation of fixed assets (CFA) by these companies, or simply capex, increased by 19% in FY24. This was nearly the same as the 20% compound annual growth rate (CAGR) recorded during FY21-23, but a significant improvement from the -1.6% CAGR during FY19-21

The analysis is based on a common sample of companies for which data has been available for the last six years. The data excludes BFSI (banking, financial services, and insurance) and IT services.

Among the top spenders are Reliance Industries Ltd (RIL) with a capex of over 1.3 trillion last year. This is followed by Bharti Airtel Ltd, Oil and Natural Gas Corp. Ltd, Tata Motors Ltd and NTPC Ltd.

As such, the aggregate capex of all companies under this study stood at 8.9 trillion in FY24 as against 14.1 trillion of net cash generated from operating activities (CFO). Note that the CFO rose even higher, at 26%, than the capex.

CFO is an important source of funds for companies and reduces the need to borrow for expansion. Interestingly, the CFO was high during FY19-21 period also, growing at a sharp 33% CAGR, aided by the commodities boom and higher profit margins due to supply chain disruption.

However, companies chose to conserve cash rather than invest because of subdued demand. In the last three years, these companies invested a total of 22.1 trillion, whereas their long-term borrowings rose by only 4.2 trillion. Lower dependence on borrowings for capex provides a more sustainable business model as it reduces companies’ vulnerability to changes in economic conditions.

Sector capex trends

In terms of sectors, oil refining accounted for the largest capex at 1.6 trillion, marginally lower year-on-year, mainly due to RIL’s investments in other businesses.

Power generation had the second highest capex at 1.1 trillion, up 42% sharply, while metals spent close to 1 trillion, up 25%. Auto and auto ancillaries spent 73,000 crore, up 44%. BFSI and IT also recorded a sharp growth of 49% in capex, which stood at 55,000 crore.

Notably, while the current economic outlook supports corporate investment plans, future capex must continue to be backed by internal cash rather than borrowings.

Lessons must be learned from the 2008-12 period when a large number of infrastructure projects, financed by significant borrowings, led to bankruptcy and a sharp increase in bad debts for banks.

Also Read: Capex blues: New project announcements plunge to multi-year low in Q1

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