Pvt capex to grow Rs1 lakh cr in 2 yrs, little focus on long-term projects

Estimate based on moderate consumption demand, global overcapacity and the working capital disruptions owing to GST

Private capital expenditure (capex) will grow by Rs 1 lakh crore till FY20, ratings agency India Ratings and Research (Ind-Ra) has said in a report.

This increase will be largely in the form of maintenance and essential upgrades by non-stressed companies. Capex recovery will revive after FY20. This estimate is based on moderate consumption demand, global overcapacity, and working capital disruptions owing to the goods and services tax (GST), and considers a compound annual growth rate (CAGR) of five-eight per cent. 

The report states that companies are likely to show unwillingness to invest in long-term projects due to muted demand and significant leverage despite a low-interest rate environment.

Of the top 200 asset-heavy companies, 125 non-stressed ones, having strong financial profiles and low leverage levels, will incur maintenance spending for the next two years and also drive growth capex beyond FY20. However, the 75 stressed ones may not be in a position to incur maintenance capex even, dragging down investment recovery for another two-three years.  

While the Insolvency and Bankruptcy Code, 2016, would accelerate the debt resolution of stressed firms, low capacity utilisation would lead to a pull-back of investment by non-stressed companies. 

The risk-averse behaviour of the banking sector, especially public sector banks, and their bad asset problems would increase their reluctance to lend to fresh projects of stressed companies.

Liquidation under the code could lead to supply constraints, giving opportunities to non-stressed companies to expand capacity. 

Growing competition and increasing mergers and acquisitions will result in consolidation among stressed companies, pushing back large-scale, debt-funded capex by non-stressed companies.

Ind-Ra says both capital markets and non-banking financial corporations have a limited appetite in terms of size and risk to absorb long-tenure funding requirements.

Government capex increased in absolute terms over FY16 and FY17 but has been decelerating as a proportion of nominal GDP. Despite the expected fiscal stimulus and higher government spending due to incremental revenues on account of the GST, the overall investment cycle is unlikely to revive.