Private capital expenditure growth to revive after FY20, says India Ratings

Capital expenditure in the private sector is slowing in its growth and this is likely to go on till 2019-20, says India Ratings and Research.

Most of the capex would now be in the form of maintenance and essential upgrades, it added. It estimates private sector capex to grow by Rs 1 trillion or five to eight per cent this year, better than the four per cent annual average of FY13-17. This annual growth was much higher during FY09-12 (13 per cent).

For the study, India Ratings analysed the top 200 asset-heavy companies that have investments of Rs 64 trillion, about 85 per cent of the total adjusted gross block of 18,000 listed/unlisted corporates. In 2015-16, these companies were estimated to have cumulative debt of Rs 32 trillion.

The reasons why capex is likely to grow slowly would be “weak domestic consumption demand, global overcapacity and negative impact of the goods and services tax (GST) on working capital,” the agency said in a report.

The capex growth would be led by 125 non-stressed companies of the top 200 asset-heavy corporates. These non-stressed companies expanded their capex by nine per cent annually in FY09-13. Their contribution to total capex in FY16-17 was 80 per cent, with capacity utilisation (CU) of 75-80 per cent.

India Ratings’ methodology defines non-stressed companies as those with interest cover greater than 1.5 times or are in ‘high ease of refinancing’ or ‘medium ease of refinancing’ categories.

“Meanwhile, 75 stressed corporates (FY13-17 eight per cent negative capex CAGR) may face difficulties in undertaking even maintenance capex. Of these 75 stressed corporates, 25 benefit from sponsor support and, thus, can at least incur maintenance capex,” India Ratings said.

“In the event of a rise in investment demand, along with low interest rates, the 125 non-stressed corporates will be the primary contributors to capex.”

The stressed companies could delay the overall investment recovery for another two to three years, as they have a low CU of 40 per cent.

The majority of capex will be driven by ‘AAA’- and ‘AA’-rated entities (75 per cent contribution to total capex).

Bond market and non-banking finance companies (NBFCs) should continue to act as the primary source of financing for capex drive, the agency said, as the large borrower framework, implementation of Basel III and International Financial Reporting Standards (IFRS), and the ageing of asset slippages for banks could act as inhibitors to funding of large capex plans.

The credit appetite of markets to fund long-term money is limited and this could act as a credit demand constraint.

Leveraged sectors such as infrastructure, metals and mining and power could report a decline in capex over FY18-20, compared with oil and gas, automobiles and telecom.

“These six sectors contribute 88 per cent to adjusted gross block and 86 per cent to annual capex. Within these sectors, private entities will contribute towards capex revival, considering the deteriorating profitability of public sector undertaking and their falling share in the overall capex,” India Ratings said.

While private capex has been rising in a moderate clip, government’s capex growth rate has declined. In 2016-17, government spending on capex increased only six per cent year on year, whereas it had grown 40 per cent in 2015-16.

Further, the share of the public sector in gross fixed capital formation was low at 22 per cent over FY12-16, compared with households (42 per cent) and private corporations (36 per cent).

“Although GST could augment government revenues, the overall investment cycle is unlikely to revive, owing to the limited ability of the government to scale up spending owing to fiscal rectitude,” India Ratings said.