Capital spending up, broad revival unlikely
A look at the headline numbers on capital spending by some of corporate India’s largest firms suggests that a revival in the investment cycle may well be underway.
At the aggregate level, capital spending by some of India Inc’s larger firms rose to a staggering ~4.63 trillion at the end of 2017-18, up from ~3.47 trillion in 2016-17.
However, a closer look at the underlying data reveals that much of the capex in the last few years has been driven by a single firm — Reliance Industries Ltd (RIL). In the last three years, RIL has spent roughly ~3.31 trillion on capex. The company accounted for 17.7 per cent of these firms’ overall capex in FY18.
Excluding RIL, capital spending by the remaining firms rose to ~3.8 trillion at the end of 2017-18, up from ~2.25 trillion the year before.
Experts that Business Standard spoke to say that a broadbased sustained revival in investment cycle seems unlikely in the short term, especially as the resolution of the twin balance sheet problem is still underway.
These are preliminary trends based on annual reports of 304 large firms. The final trend will be available once all firms publish their annual reports for 2017-18. Capital spending here has been estimated on the basis of gross block of assets at the company level.
An earlier Business Standardreport had suggested that utilisation rates are on the rise in automobile ancillaries, engineering, casting and sheet metals and cement which could have prompted the rise in capital expenditure. This finding was corroborated by Reserve Bank of India’s (RBI’s) data on bank credit to industry which showed a rise in working capital loans.
In fact, the RBI’s most recent capacity utilisation survey also shows that capacity utilisation went up to 75.2 per cent at the end of Q4FY18, up from 71.2 per cent in Q1FY18. This suggests a rise in demand in some sectors could have prompted fresh expenditure by firms in these select few sectors.
A sector-wise analysis shows that capital spending rose in sectors such as automobiles and auto ancillaries, capital goods (both electrical and non-electrical equipment) cement and steel.
However, in other sectors such as power generation & distribution and refineries, capital spending by firms that have released their annual report has fallen over the past year when compared with the previous year.
It is possible that in sectors such as steel and power generation, where a number of companies are going through the insolvency process, the stronger players might not opt for greenfield projects. Rather, as bidding for various insolvent companies in these sectors suggests, the stronger players seem to be keener on acquiring the assets of these insolvent companies, giving them less incentive to launch fresh investments.
Thus, it is possible that such sectors will not see an uptick in fresh investments as companies may first wait for existing capacity currently trapped in the insolvency process to be utilised more efficiently.
As an earlier CRISIL study had noted, “About a fifth of India’s crude steel capacity held by these companies (firms going to the National Company Law Tribunal, or NCLT) will move to stronger hands which will result in better working capital and liquidity management. That, in turn, will lead to improving utilisation levels.”