India Inc's capital expenditure to remain low

A likely interest rate cut by the Reserve Bank of India (RBI) will not be enough to increase capital expenditure of companies facing falling commodity prices, a decade-low capacity utilisation and high debt.

The RBI will review its bi-monthly monetary policy next week with Finance Minister Arun Jaitley advocating a rate cut to prop up business sentiment.

Corporate bosses said although an interest rate cut would improve sentiment, it would not lead to investment. Capital expenditure by Indian companies in 2014-15 was at a five-year low of Rs 2.76 lakh crore.

"This is time to consolidate operations instead of fresh capital expenditure," said D Bhattacharya, managing director and chief executive officer of Hindalco. "Demand is not showing any sign of a pick-up," he added.

State-owned companies, which are sitting on a huge cash pile, are, however, planning big capital expenditure in the next two financial years.

In the last three years, Reliance Industries, ONGC and Tata Motors spent the most on building capacity.

Reliance Industries, the biggest spender, invested close to Rs 60,000 crore in the roll-out of its telecom services. It also spent close to Rs 1 lakh crore on expanding its petrochemicals and oil refining business.

"Most companies are waiting for a demand pick-up, which is not expected in this financial year. The cement sector is expecting demand to grow by 2-3 per cent in the next two quarters, which is not very good," said an executive with a cement company.

Rating firm Ind Ra said in a study today demand for automobiles and cement was likely to grow in the low single digits over the next 12-24 months.

Diversified manufacturing, where capacity utilisation has fallen 20 per cent from its peak and which has issues of high leverage, may not see meaningful capital expenditure in the next 24 months.

The top 80 spenders are typically responsible for three-fourths of the capital expenditure of the 500 biggest companies, according to Ind Ra.

The remaining 420 companies are struggling with high leverage, low cash generation and challenges in accessing capital.

Some of them may face difficulty in undertaking even maintenance capital expenditure.

These companies would drag down capital expenditure growth over the next two to three years, Ind Ra said.

Power companies have stopped building capacity as older plants face issues with coal supplies and disputes with state-owned distribution companies over power tariffs.

Heavily indebted power companies like those of the Lanco and Avantha groups have exited projects to lower their leverage. The Jaypee group has sold its power projects in Himachal Pradesh for Rs 9,700 crore.

"Companies are using the slowdown to restructure their balance sheets. Creating fresh capacity is taking a back seat," said the chief executive of a large company.

Ind Ra said the highest growth in capital expenditure was during 2006-2008 despite high lending rates.

"A sharp cut in interest rates may cause a temporary rise in capital expenditure, but a low interest rate by itself cannot sustain capacity building," it said.