India Inc capital expenditure to remain muted this financial year

Indian private sector companies are not expected to press the pedal on fresh capital expenditure in the financial year 2016-17, or FY17, mainly because of low capacity utilisation of existing units, highly leveraged balance sheets and static demand.

While a few large companies such as Reliance Industries and Tata Steel - which are among the top 20 capex spenders between FY12 and FY14 - are nearing the end of their capex cycles, after investing in new capacities in the country, fresh investments by a majority of companies is not on cards despite Finance Minister Arun Jaitley extending the 15-per-cent investment allowance for FY17 to push companies to invest.

"We expect the capital expenditure by Indian companies to remain muted in FY17 and expect a meaningful revival only from the second half of FY19. The growth capex presently is limited largely to public sector companies with investments in the private sector focussed on solar, wind, transmission and to a smaller extent on auto and auto ancillaries," said Rakesh Valecha, senior director, India Ratings & Research.

The investment will remain muted after recording negative growth in FY15 and a marginal uptick in FY16, which ended on March 31. In fact, the capex spending of the top 500 corporate entities, after hitting the peak of Rs 3.1 lakh crore in FY11, has kept falling, as high finance cost ate into corporate profits. The capacity utilisation of manufacturing companies is down 20 per cent from its peak.

Experts said the data provided on investment intentions by the government indicate increased investments for electrical machinery, metallurgical industries, chemicals, textiles, and food processing. These investments should materialise in the new financial year depending on demand conditions as well as interest rates.

 

The good news is that the government's efforts to aggressively push infrastructure spending in roads, railways and defence is expected to increase demand in low single digits for few sectors such as cement and steel companies.

"The government push would have backward linkages with industries such as cement, machinery, steel etc, which, in turn, will witness higher capacity utilisation rates and feed into the demand for fresh investment. This I think will materialise with a lag as companies fully utilise their capacity before going for fresh investment," said D R Dogra, chief executive officer and managing director, CARE Ratings.

Corporate leaders say over the long term, Indian market looks more promising for investments and their focus is on to complete the projects in hand. Tata Steel, which has invested Rs 25,000 crore in a new three-million-tonne plant in Odisha said their first priority is to ramp-up the production at the site.

"The market conditions are not in the best of the place but I think we have done a significant amount of work in identifying segments and sector to sell our additional volume. There are potentials for expansions for sure but whether it is three or beyond but that will have to come at appropriate time. We have spent a lot of time and have faced a lot of hurdles to bring this asset to life," said Kaushik Chatterjee, group executive director, Tata Steel.

Apart from Tata Steel, Reliance has invested Rs 150,000 crore in rolling out its telecom network - Jio. Reliance will launch its wireless telephone network in the FY17 - making it the biggest capital expenditure in the recent times. On November 30 last year, Bharti Airtel announced an investment of Rs 60,000 crore in the next three years.

Additional reporting by Aditi Divekar