Capex cycle to weaken further in FY14

Analysts expect project cancellations to accelerate and new order inflows to moderate sharply

The capital expenditure cycle is slated to weaken further in FY14, analysts expect. While few new projects have been announced in FY13, the coming year is expected to see several projects being scrapped, as business confidence remains low and there is no sign of clearances coming through. Though the second quarter saw the total cost of projects sanctioned increase sequentially, on a year-on-year basis it is down 25 per cent. According to Religare Institutional Research: “The decline in sanctions reflects a lack of new project announcements, especially in the roads and power sectors. Also, going by the disbursement profile of currently sanctioned loans, capex is expected to further decline in FY14.”

While the power sector is grappling with fuel availability issues, other sectors like metals are also now joining the queue in scrapping capacity additions for similar reasons. The mining ban in various states has taken a toll on metal producers.

Analysts also say the latest round of the Reserve Bank of India’s (RBI) business confidence survey suggests that confidence levels are at the lowest in the last 14 quarters. Among the major factors that seem to be bothering corporate India are high interest rates and infrastructure bottlenecks. Capacity utilisation levels as measured by RBI’s Order Books, Inventories and Capacity Utilisation Survey (OBICUS) is showing a slight improvement sequentially at 75 per cent in Q2FY13 (up 130 basis points), after bottoming out in Q1FY13, but is considerably lower than peak utilisation levels of 83 per cent in Q4FY11. Religare expects cumulative moderation of 11 per cent in capex expectation for FY14 over the past one year.

Barclays has a similar view although for a different reason. It believes that before the general and state elections, order momentum will slow. It says: “Various other indicators (new project adds, road ordering, industrial credit, etc) also indicate some moderation in momentum. We believe that this is largely driven by slower government ordering, which is likely to account for 50 per cent of inflows in FY14.” The sluggishness continues for a couple of quarters even after the elections, which effectively means that not only will FY14 see a sharp moderation in ordering but it will also spill over into the next year. The infrastructure sector will be affected the most. Companies that are geographically diversified would be better placed.

Given that the infrastructure and capital goods sector faces such severe tailwinds, analysts believe that swift and decisive policy moves to resolve fuel availability and lower interest rates could benefit the sector.