India Inc capex grows, but revival in investment cycle unlikely; here's why

A closer look at data reveals that much of the large firms' capex in FY18 was driven alone by Reliance Industries, which has spent roughly Rs 3.31 trillion on capex in the past 3 years

A look at the headline numbers on capital spending by some of corporate India’s largest firms suggests that a revival in the investment cycle may well be underway.

At the aggregate level, capital spending by some of India Inc’s larger firms rose to a staggering Rs 4.63 trillion at the end of 2017-18, up from Rs 3.47 trillion in 2016-17.

However, a closer look at the underlying data reveals that much of the capex in FY18 is driven by a single firm – Reliance Industries Ltd (RIL). In the last three years, RIL has spent roughly Rs 3.31 trillion on capex. The company accounted for 17.7 per cent of these firms’ overall capex in FY18.

Excluding RIL, capital spending by the remaining firms rose to Rs 3.8 trillion at the end of 2017-18, up from Rs 2.25 trillion the year before.

These are preliminary trends based on annual reports of 304 large firms. The final trend will be available once all firms publish their annual reports for 2017-18. Capital spending here has been estimated on the basis of gross block of assets at the company level.

A sector-wise analysis shows that capital spending rose in sectors like automobiles and auto ancillaries, capital goods (both electrical and non-electrical equipment) cement and steel.

However, in other sectors, such as power generation & distribution and refineries, including RIL, capital spending by firms that have released their annual report has actually fallen over the past year when compared with the previous year.

Part of the explanation for the rise in capex over the past year in these sectors can be traced to a rise in capacity utilisation. An earlier Business Standard report had suggested that utilisation rates are on the rise in automobile ancillaries, engineering, casting and sheet metals and cement. This was corroborated by RBI data on bank credit to industry which showed a rise in working capital loans.

In fact, the Reserve Bank of India’s (RBI’s) most recent capacity utilisation survey also shows that capacity utilisation went up to 75.2 per cent at the end of Q4FY18, up from 71.2 per cent in Q1FY18. This suggests a rise in demand in some sectors could have prompted fresh expenditure by firms in these select few sectors.  

But experts Business Standard spoke to say that a broadbased sustained revival in investment cycle seems unlikely in the short term, especially as the resolution of the twin balance sheet problem is still underway.

It is possible that in sectors like steel and power generation, where a number of companies are going through the insolvency process, the stronger players might not opt for greenfield projects. Rather, as bidding for various insolvent companies in these sectors suggests, the stronger players seem to be keener on acquiring the assets of these insolvent companies, giving them less incentive to launch fresh investments.

Thus, it is possible that such sectors will not see an uptick in fresh investments as companies may first wait for existing capacity currently trapped in the insolvency process to be utilised more efficiently.

As an earlier CRISIL study had noted, “about a fifth of India’s crude steel capacity held by these companies (firms going to the National Company Law Tribunal, or NCLT) will move to stronger hands which will result in better working capital and liquidity management. That, in turn, will lead to improving utilisation levels.”