Ind-Ra estimates that the capex spending in FY15 may have nosedived to INR2.76trn-INR2.8trn (FY14: INR2.94trn; FY13: INR2.85trn), the lowest in the last five years. FY16 capex spend may range between INR2.8trn-INR3.0trn.Ind-Ra estimates that the top 20 spenders may invest INR1.8trn-INR2.0trn in FY16 (FY15: INR1.67trn). In FY15, the top 20 capex spenders were responsible for 60% (FY14: 59%, FY13: 52%) of the capex spending of these 500 corporates. Outside the top 20 spenders the capex spending may be limited to around INR1.1trn, mostly maintenance capex and essential upgradations.
Past capex spending trends suggest that heavy capex spending usually starts when capacity utilisation closes in towards the 90% level. Ind-Ra estimates that while the capacity utilisation of these 500 corporates may have shown a marginal uptick in FY15, still the utilisation level continues to hover around a decade low. Assuming 8% growth in demand volume, it may take 24 to 36 months to revive capex cycle. Post 2HFY18, these 500 corporates may exhibit incremental annual capex spending in the range of INR400bn-INR600bn. However, if the growth in demand growth is assumed to be 7%, the revival will happen in 36 to 42 months.
Three sectors namely oil & gas, metals & mining and power typically constituted 50%-60% of the total annual capex spending of the top 500 corporates and exhibited annual capex spending growth of 15%-30%. Low commodity prices and a high level of uncertainty about the revival of commodity prices may discourage most commodity players, who are substantial contributors to private capex spending, from taking up large capex spending. Particularly, the metals & mining, which apart from low commodity price levels is experiencing issues in terms of capacity utilisation levels which have halved from their peak levels, may see limited capex in the next 12 to 24 months.
Public sector units in the power and oil & gas sectors are likely to continue with a steady level of capex spending. Sectors such as auto and cement are likely to exhibit low single digit growth over the next 12 to 24 months. The diversified manufacturing sector, where the capacity utilisation has fallen by 20% from its peak, and which has high leverage, may not see meaningful capex spending in the next 24 months.
The current capex cycle may be revived by significant government spending. Past observations suggest that gross fixed capital formation (GFCF) revives first, driven mostly by government spending, following which private corporate spending picks up. Growth rate of the economy-wide GFCF has been in low but steady single digit post FY12. This may be a precursor for private capex spending; however, if the private spending falls below the FY15 levels, it may have a moderating impact on GFCF. Additionally, the historical data suggest that the capex spending of these 500 corporates may be a lead indicator of down-cycles in GFCF.
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With respect to under implementation projects, the government has been faring better than private corporates particularly post FY13. As such, this trend is likely to continue over the next 24 to 36 months.
The government's proposed initiatives on infrastructure related spending attributable to Indian Railways, Coal India and public sector units in the power sector and renewable energy, if executed in the requisite scale and a timely fashion, may trigger a capex revival in private corporates in 2HFY17.
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