Bankers say growth is healthier and based on some caution, not just driven by credit
Capital expenditure (capex) seems to be picking up momentum but promoters are moving cautiously, as they don’t want to be saddled with excess capacities as in 2001 or 2008.
Companies across the board are announcing capex plans. Tyre major Bridgestone will spend Rs 2,500 crore to set up a new plant at Chakan, near Pune; Tata Consultancy Services will spend Rs 2,200 crore of capex this year, while Tata Steel just tied up Rs 9,000 crore of loans to raise capacity at Jamshedpur to 9.7 million tonnes at a cost Rs 14,000 crore.
JSW Steel will invest Rs 7,000 crore to increase steel-making capacity at Vijayanagar (Bellary) to 10 mt, hydel power major NHPC will invest Rs 4,500 crore in capex this year and gas transportation major GAIL plans to invest Rs 50,000 crore in three years. These are just some announcements, not an exhaustive list.
Analysts expect $90-100 billion (Rs 4-4.5 lakh crore) of capex by public sector units (PSUs) and private companies in the next two to three years. Finance Minister Pranab Mukherjee, in his budget speech, had said PSUs earmarked $60 billion (Rs 2.7 lakh crore) of capex in FY11, while some large private companies have announced capex of $30 billion to be spent over FY11-14, HDFC Bank said in a recent note.
‘‘We expect at least $90 billion of capex in the next two-three years. Companies have parked their surplus funds with mutual funds. With the real rate of return turning negative, the incentive for corporates to invest in mutual funds has diminished. Given the recovery, no company would want to sit on cash,’’ said Rahul Jain, analyst, HDFC Securities.
A study of gross capital formation since 1995-96 by PSUs and private companies reveals a correlation with the real rate of return. Jain says the year-on-year asset growth is higher in years whenever the real rate of return turned negative. So, companies will eventually expand capacities. HDFC Bank expects credit growth of 18 per cent over FY09-12, driven mainly by infrastructure and corporate credit.
A good indicator of investment activity is the pick up in long steel products like billets, wire rods and TMT bars. Volumes have gone up in the past one and a half months and prices have increased by Rs 3,000 crore a tonne, said JSW Steel CFO Seshagiri Rao. While demand for flat products (like coils and sheets) grew 15 per cent last year, long products’ demand grew only 4-5 per cent last year; this is now expected to grow faster.
Another indicator is the revival in real estate. Sales and prices of homes have gone up across markets, barring a few. ‘‘In any economic cycle, when it bottoms out (like in 2002-03), housing is the first to pick up,’’ said Indranil Sen Gupta, chief economist-India, Bank of America-Merrill Lynch.
He feels capex has three parts. The first is investment in infrastructure, which Sen Gupta feels has nothing to do with demand—there is severe infrastructure deficit in India and one can keep adding indefinitely---but is more a function of funding. The second is housing. Finally, there’s conventional capex, which Sen Gupta believes will take a few more months to pick up.
There are other indicators of a spurred capex. Construction equipment makers, for instance, have reported one of their best quarters in recent times; Larsen & Toubro is sitting on an all-time high order book. Cement prices have been ruling firm, there have been a few mergers and acquisition deals, and promoters are looking at adding capacities.
A leading equipment maker which supplies air-conditioning units to the railways has been finding it difficult to service demand, as it is not being able to source compressors. ‘‘Capacities are clearly getting choked and people really need to start adding capacities,’’ said Janak Desai, head of corporate banking, ING Vysya Bank.
The infrastructure space could be a key driver for growth, but bankers say companies are also coming up with expansion projects across sectors like glass, pharma, auto ancillaries and laminates. R K Gupta, general manager (credit), Dena Bank, said companies have started availing project loans, and foresees a good pick up in credit in May-June. ‘‘Wherever projects were on hold, they have been revived,’’ he said.
Not everyone is getting carried away. Pronab Sen, India’s former chief statistician, recently said, “There is no evidence of fresh investment and a serious question of sustainability for both consumption and investment demand. Given the indications, there is no strong demand recovery.”
Sen said consumer durables’ purchase was not a good indicator of the economy’s recovery, as it could be due to a one-time rise in income of government employees on the back of implementation of the sixth pay commission recommendations.
But, durables’ makers like LG say there’s no let up in sales. Home appliance sales are growing at 18-20 per cent. Sales of conventional televisions have slowed, as sales of LCD TVs are growing at 100-150 per cent. And, this growth is not on the back of credit; consumers are paying out of their pocket. There’s little credit available today, unlike in 2007.
Companies like Tata Motors are witnessing great demand for their small commercial vehicles that do last-mile transportation of goods. Experts say this shows that growth is percolating deeper. Sales of commercial vehicles have recovered sharply in the past few months. Again, bankers say that transporters are buying vehicles because they see a recovery, and not because it is driven by credit.
Janak Desai, head of corporate banking, ING Vysya Bank, says the momentum on capex has just started and we are probably in the beginning of the cycle. ‘‘Growth may not be driven by significant growth in credit but by underlying growth in the economy,’’ he said.
Promoters will also be encouraged by the improvement in consumer sentiment. ‘‘The level of pain in India (due to the downturn) has not been intense and the bounce back has been extremely strong. The B-school salaries and good increments will encourage consumers to spend. The only thing that could derail this growth is if infrastructure is derailed (as infrastructure has been the key driver for growth),” said a banker.
What’s different today is that promoters are factoring risk into their capex plans. Jyoti Jaipuria, head of research, Bank of America-Merrill Lynch, said if the overall mood in 2007 was of euphoria, and in 2008-09 of fear, today people are hoping that things get better. ‘‘We are not seeing the kind of capex we saw in 2007. People are cautiously optimistic but nobody is saying we are increasing capacity by 50 per cent,’’ he said.
The key reason for that, Jaipuria feels, is the perception on risk. ‘‘In 2007, people had forgotten to factor in risk in their calculation. Today, risk is back,’’ he said. That may not be a bad thing. ‘‘The expansion today is not as bold as 2007 but is much healthier. The relative leverage is much lower today, which is extremely healthy,’’ said Desai.
