FDI buoyancy missing in capex of listed MNCs

The buoyancy in foreign direct investment (FDI) flows into India is missing in the capital expenditure figures of multinational companies (MNCs) listed in the country.
 
The combined capital expenditure by the listed Indian subsidiaries of global majors grew at a compounded annual rate of 2.4 per cent during the three years ending 2015-16, sharply down from the 12.9 per cent annualised growth in the previous five years. In contrast, inward FDI grew at a compounded annual rate of 18.6 per cent during the 2012-13 to 2015-16 period, according to Reserve Bank of India data. India received FDI worth $44.9 billion during FY16, up from $27 billion three years ago.
 
The analysis is based on a sample of 68 listed subsidiaries of global majors part of the BSE 500, BSE Mid-Cap or BSE Small-Cap indices. It shows their capital expenditure was down 1.6 per cent during the first half of FY17 over the corresponding period a year ago. Companies in the sample include Hindustan Unilever, Maruti Suzuki, Siemens, Bosch, Nestlé, Colgate-Palmolive, ACC, Ambuja Cement, ABB, BASF India, Cummins India, Bayer Crop Science, GSK Pharma and GSK Consumer. Capex captures changes in fixed assets — gross block net of accumulated depreciation — plus capital work in progress.
 
MNCs have cut back on fresh investment despite a sharp improvement in their profitability. The combined net profit of the sample companies was up 34.4 per cent, year-on-year (y-o-y), during the first half of 2016-17 on top of the 17.1 per cent growth, y-o-y, reported during 2015-16. The MNCs’ combined net profit grew at a compounded annual rate of 9.6 per cent during the three years ending in 2015-16.
 
Data suggests these companies now prefer to accumulate cash rather than risk capital on new projects. The combined cash reserves of the sample are up 50 per cent in the past three years, growing at a compounded annual rate of 15.2 per cent. The companies were sitting on cash and cash equivalent worth Rs 63,400 crore at the end of 2015-16, up from Rs 41,500 crore at the end of 2012-13. Over this period, their fixed assets grew from Rs 68,500 crore to Rs 73,600 crore.
 
“Companies across sectors are cutting back on fresh capital expenditure because of poor capacity utilisation. MNCs cannot be immune to this trend,” said G Chokkalingam, founder and chief executive officer, Equinomics Research & Advisory.
 
MNCs, however, have seen a much bigger cut in capital expenditure growth than the rest of corporate India. The combined capital expenditure growth by non-MNC companies was up 6.6 per cent in 2015-16, against the 1.9 per cent growth reported by MNCs. The combined capital expenditure by non-MNCs has grown at a compounded annual rate of 10.2 per cent in the past three years, nearly four times faster than that by MNCs.
 
“Listed MNCs are largely manufacturing companies, but the bulk of the FDI has been in the services sector and that too in the unlisted space. Official FDI statistics also include minority investment and stake purchases by MNCs in domestic companies,” said Devendra Pant, head economist and head of  public finance at India Ratings. Historically, there has been a strong correlation between FDI inflows and capital expenditure by listed MNCs. The correlation weakened after the Lehman crisis in 2008 and seems to have reversed in the recent past.
 
“A significant part of FDI is now accounted for by the dotcom and e-commerce sector, where it may be used to fund losses rather than capital expenditure. In the listed space we have seen MNCs bringing in FDI to raise their stakes in Indian ventures rather than to fund new projects,” said Dhananjay Sinha, head of  institutional equity at Emkay Global Financial Services.