Firms bet on foreign investment amid slump
As demand for goods & services slows in the country, India Inc has turned its attention on growth opportunities in overseas markets. There has been a sharp uptick in outward foreign direct investment (FDI) by Indian companies in the past two years, despite a fall in overall capital expenditure (capex) in the corporate sector.
According to the Reserve Bank of India figures, outward FDI by India Inc was up 38 per cent in 2018-19 (FY19) to $12.6 billion. This was a successive year of strong growth in outward FDI by Indian companies. The figure has nearly doubled in the past two years, from $6.6 billion in FY17.
In comparison, there has been a decline in the overall capex by corporates during the period. New capital expenditure or the annual change in the companies' gross block at consolidated level was down 18.3 per cent year on year (YOY) in FY19 to ~3.81 trillion, from ~4.7 trillion a year ago. This is based on the financials for top 1,000 listed companies, excluding banks & oil and gas firms ( See adjoining chart).
The balance of payment data for the first quarter suggests that outward FDI is set to rise further in FY20. Direct investments by India Inc were up by 19.2 per cent during the first three months of FY20, building on growth in the previous two years. Outward FDI increased to $4.6 billion during April-june 2019, as against $3.8 billion in the corresponding period last year.
The company-level data suggests many are investing more abroad than in the domestic market. For example, the top 51 listed companies with large foreign subsidiaries made fresh capex worth ~1.26 trillion last fiscal, nearly 60 per cent of which was accounted for by their overseas subsidiaries. The trend was similar in FY18. Together, overseas subsidiaries of these 51 companies spent ~73,600 crore on capex in FY19 as against ~48,000 crore spent on new plant & equipment and product development by their parent companies in India.
Some of the major firms in the sample are Tata Motors, Tata Steel, Hindalco, Motherson Sumi, UPL, Tata Chemicals, Tata Global Beverages, Bharti Airtel, Cipla, Tata Communications, Infosys, Wipro, Godrej Consumer, and Tata Consultancy Services. For example, Tata
Motors' overseas subsidiaries spent around ~17,000 crore on capex, including new product development in FY19, against a capex of ~2,200 crore by the parent company (Tata Motors standalone entity). Motherson Sumi, India’s largest component maker, invested ~5,000 crore in its foreign subsidiaries last year, as against capex of around ~500 crore in India.
The analysis is based on incremental shift in the gross block of India’s top listed companies with large overseas subsidiaries on standalone and consolidated basis. Estimates on overseas investments are based on the difference in incremental capex (gross block) on consolidated and standalone numbers, excluding their listed domestic subsidiaries. Some subsidiaries of the listed parent companies include Tata Metaliks, Tinplate Company, Tata Long Products, Bharti Infratel, Tata Coffee, and Hindustan Zinc.
Experts attribute this to demand slowdown in the domestic market and big-ticket acquisition by Indian companies in sectors such as pharmaceuticals, agro chemicals and information technology services. “It would be too premature to say overseas investments exceed domestic investments for corporate India in general. This could be true for specific companies such as Tata Motors, Motherson Sumi or UPL where domestic business is much smaller than their global operations,” says G Chokkalingam, founder and MD of Equinomics Research & Advisory Services.
The agrochemicals maker UPL was the single largest overseas investor from India last financial year. The company's investment outside India was up nearly ~33,000 crore last financial year as it closed the acquisition of Arysta Lifesciences for $4.8 billion.
A large bump-up in outward FDI by India Inc was first seen in the run-up to the 2008 Lehman Crisis when Tata Steel, Tata Motors, and Hindalco closed a string of multi-billion dollar overseas acquisition. This was followed by another wave of multi-billion dollar overseas acquisition in FY10 and FY11 when companies such as Bharti Airtel and Motherson Sumi acquired large companies abroad. This was followed by a slump in outward FDI between FY15 to FY17. FY09 remains the high mark for outward FDI when Indian companies together invested nearly $19.30 billion overseas. This figure then slumped to a 10-year low of $4 billion in FY15.