Some companies buck downtrend in capacity use
Despite the subdued demand environment, a handful of companies have seen a sharp increase in their capacity utilisation.
According to Edelweiss Securities’ data available to Business Standard, 10 companies saw an increase of 250 to 2,030 basis points (bps) in their capacity utilisation in FY17 (based on latest available data). Another four witnessed an increase of 80-250 bps in their capacity utilisation during 2016-17 over 2015-16.
GAIL, Vesuvius India, NMDC, Hindalco and Somany Tiles are the top five on the list. Six of the 14 companies saw an improvement in utilisation for consecutive years (FY16 and FY17). These are Petronet, Maruti Suzuki, Fortis Healthcare, Mahindra and Mahindra (M&M), Hindustan Petroleum Corporation (HPCL) and Ashok Leyland. Clearly, these have bucked the slowdown trend seen over the past two to three years.
Low capacity utilisation levels for most private companies in recent years have led to a near freeze in their capital expenditure. Experts believe this metric should be 80-85 per cent to push private investments and for revival in the economy, as well as in credit growth.
“Most private companies’ capacity utilisation is still 7072 per cent. Unless this goes up to 80-85 per cent, corporate capex will not pick up," says Tirthankar Patnaik, India Strategist at Mizuho Bank.
Interestingly, five companies in the list enjoy utilisation in excess of 80 per cent (see table). Within these, three are operating at over 100 per cent. The list is arrived at by looking at 100-odd top manufacturing/services companies covered by Edelweiss Securities.
Resources companies in the oil & gas and metals sectors dominate, followed by automobiles and pharmaceuticals. Easing global prices of liquefied natural gas (LNG) has aided volumes and capacity utilisation at Petronet LNG and GAIL in recent times. Pick-up in industrial demand for gasbased fuels will also augur well for these companies.
Ramp-up of new smelters in the past two years have boosted domestic capacity utilisation at Hindalco. As the company steps up focus on value-added products, this is likely to continue, believe analysts. India's largest iron ore producer, NMDC, too, saw a healthy improvement in its utilisation on the back of higher steel production. Favourable cost economics toward pellets will aid domestic iron ore demand, boosting NMDC's prospects.
Somany Tiles stands to gain from both demonetisation and the goods and services tax roll-out, as it will create a level playing field between organised and unorganised players, and enable market share gains for organised ones like Somany. As the company ramps up presence in the faucets and sanitary-ware segments, its utilisation levels are likely to improve further.
Overall, most of the 14 companies are among the top three (by market share) in their respective sectors and, hence, are well poised to gain from an improvement in the economy.