Capacity utilisation of India Inc hits new low

Least spend on new projects recorded since FY10

India Inc’s asset-turnover ratio dropped to a new low of around 70 per cent in FY21, indicating a further decline in capacity utilisation across sectors last financial year owing to the pandemic.

This raises a question on the companies’ ability to kick-start a fresh round of capacity expansion. The ratio was

78 per cent in FY20 and a record high of 116 per cent in FY06.

Analysts expect a rise in the assetturnover ratio and capacity utilisation in FY22 but say companies go for capacity expansion only when the figure approaches around 100 per cent.

“The asset-turnover ratio is a good indicator of capacity utilisation in the industrial sector. And the latest ratio suggests companies in most sectors are sitting on a lot of spare capacity, which gives them little incentive for capacity expansion or new projects,” said Dhananjay Sinha, managing director and chief strategist, JM Financial Institutional Equity.

According to him, companies go for capex only when the asset-turnover ratio approaches 100 per cent and stays above that for at least a few years. This was the case during the big capex boom before FY10. (See the adjoining charts)

For example, sales of passenger vehicles in FY21 were at the same level as in FY16 while two-wheeler sales in the domestic market last financial year were the lowest in the last seven years.

The automobile sector accounts for nearly a quarter of all manufacturing output in the country.

Combined net sales of 682 companies, excluding banks, non-banking financial companies, and oil and gas but including Reliance Industries, were down 7 per cent in FY21 to ~46.6 trillion, the lowest in the last three years.

In comparison, companies’ net profits were up 55 per cent year-on-year on a low base to reach ~3.38 trillion in FY21. The profits in FY21 were, however, 2.6 per cent lower than those in FY19.

A poor demand outlook shows in the value of new projects under implementation by companies. The combined capital work in progress by the companies in the Business Standard sample — at ~3.6 trillion in FY21 —was the lowest in 11 years.

Others, however, say many companies have now begun to talk about capacity expansion.

“Management commentary has been very bullish during the Q1FY22 results season with many companies indicating capex to meet increased demand. We have to see how much of this translates into projects on the ground,” said Shailendra Kumar, chief investment officer, Narnolia Securities. Companies in commodity sectors such as cement and steel have, however, announced capex plans, encouraged by a sharp jump in their revenues and profits in the post-pandemic period. They are also betting on demand coming from higher government expenditure.

“The fiscal stance seems to be poised for an acceleration of government capital expenditure in the coming years, especially in infrastructure. Alongside, there are very strong signals of a pick-up in the private sector capex cycle, driven by companies like Ultratech,” said Kumar Mangalam Birla, chairman of Aditya Birla Group.

Ultratech has announced plans to increase its capacity by an additional 19.8 million tonnes with an investment of over ~6,500 crore.

India’s largest private sector firm, Reliance Industries, has started recruitment as part of its ~75,000 crore investment in the renewable sector.