Ind-Ra believes the stressed corporates have a limited ability to undertake any meaningful capex activity over the next five-to-seven years owing to weak credit metrics as indicated by interest cover of 0.5x and net leverage of 17.8x, along with an 8% decline in EBITDA.
Capacity Utilisation Unlikely to Rise over FY18-FY20: Ind-Ra expects efficiency ratio/capacity utilisation of the top 200 asset-heavy corporates to remain at FY15-FY17 levels of 65%-70% over FY18-FY20 owing to global overcapacity and transition to the Goods and Services Tax regime. Moreover, utilisation levels are likely to be impacted by stagnant demand growth as reflected by a 9% growth in nominal private final consumption expenditure in 1HFY18 compared with a double-digit growth in FY17. Export demand registered a 7% yoy growth during April-November 2017, similar to growth levels witnessed in April-November 2016.
While non-stressed corporates achieved high capacity utilisation of 75%-80% in FY17, the presence of stressed corporates with low capacity utilisation of 40%-45% could lead to an increase in merger and acquisition activities across sectors under the Insolvency and Bankruptcy Code over FY19-FY20, resulting in delay in any significant greenfield capex.
Capex Recovery Longer for Leveraged Sectors with Falling Capacity Utilisation: Infrastructure, metals and mining, and power sectors, which registered high leverage (9x-10x) and a significantly lower capacity utilisation of 20%-30% in FY17 from the peak FY06 levels of 80%-90%, could lower their capex spending over FY18-FY20 compared with oil and gas (FY17: up 33% yoy, FY16: down 22% yoy), auto (FY17: up 1% yoy, FY16: down 8% yoy), and telecom (up 10% yoy, up 53% yoy) sectors. Low plant load factor and decline in power purchase agreements have led to a 2% yoy reduction in private sector investments in the power sector.
Additional Equity Needed If Credit Demand Revives: As per Ind-Ra's analysis, 75% of the top capex spenders belong to 'AAA' and 'AA' rated categories. The agency believes, under the government's proposed bank recapitalisation plan, the quantum of capital injection in public sector banks and mobilisation of capital should largely cover the provisioning shortfall for stressed assets and address issues pertaining to non-performing assets. The capital injection may also support modest growth in advances but is unlikely to support any significant investment demand by corporates. Therefore, bond market and non-banking financial companies are likely to be an alternate source of capex funding. However, weak appetite of capital markets and non-banking financial companies to absorb long-term funding requirement of infrastructure companies and the recent increase in bond yields are likely to result in demand constraints.
Government Spending Insufficient to Crowd in Private Capex: As per Ind-Ra's capex cycle report published in October 2017, growth in government (central and state) capital spending on capex (FY17: 6% yoy; FY16: 40% yoy) and share of spending as a percentage of nominal GDP have been decelerating. The agency believes, given the limited scope of additional fiscal spending boost, incremental government support is likely to fall short of requirement for a meaningful improvement in private capex.
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