1. Capital spend by India Inc to stay muted in FY16; onus shifts to govt

Capital spend by India Inc to stay muted in FY16; onus shifts to govt

The onus of launching a new investment cycle and to ‘crowd in’ growth through bigger spends is on the Modi government.

By: | Mumbai | Updated: June 22, 2015 9:06 AM
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Capital expenditure is likely to remain subdued this year; a clutch of 17 top firms is expected to incur spends of around Rs 2.8 lakh crore, a shade below that in FY15. (Thinkstock)

Reliance Industries (RIL) is gearing up to spend Rs 2 lakh crore over the next 12-18 months, chairman Mukesh Ambani said at the firm’s annual general meeting about a week ago. The conglomerate continues to spew cash and is putting the money to work in new businesses like telecom and retail. Kumar Mangalam Birla, chairman, Aditya Birla Group, meanwhile, is growing his cement business through acquisitions.

But for much of India Inc, the cash isn’t flowing in quite as fast. Moreover, most industrialists find they’ve created capacity for which there’s not enough demand. Which is why capital expenditure is likely to remain subdued this year; a clutch of 17 top firms is expected to incur spends of around Rs 2.8 lakh crore, a shade below that in FY15.

Cairn India, for example, has slashed capex by more than 50% for a variety of reasons, especially falling crude oil prices.

That means the onus of launching a new investment cycle and to ‘crowd in’ growth through bigger spends is on the Modi government.

The planned spend of Rs 2.4 lakh crore for FY16, of which close to Rs 70,000 crore is allocated to infrastructure, say analysts, should help kick-start the capex cycle.

The good start to the year — government spends were up 28% year-on-year in April — needs to continue.

Data from CMIE showed that in the January-March quarter, stalled investments dropped to 6.8% of GDP from 7.1% of GDP in the December 2014 quarter. However, at 80%, private sector projects dominated the stock of stalled investments. This is in keeping with what R Shankar Raman, chief financial officer at Larsen and Toubro, has been saying for some time now, namely that the private sector isn’t back in the investment mode.

One reason for this is that balance sheets remain stressed; the net debt for ten large infrastructure companies stood at Rs 2 lakh crore at the end of March 2015. The gross debt number for these firms — which included JP Associates, Lanco Infratech, GMR Infra, Suzlon Energy and GVK Power — would be far higher.

capex

With infra firms clearly lacking the wherewithwal to invest, the likes of RIL, Tata Motors, Idea Cellular and Tata Steel will be driving capex this year. Himanshu Kapania, CEO, Idea Cellular, says his firm would be looking to spend Rs 5000 crore this year, much of it on ‘new markets that have opened up post the recent telecom auctions’.

The SAIL management has indicated it may spend as much as 20% less this year; other PSUs that say spends will be flat include Power Grid, NTPC and IOCL. Among those that are looking to increase spends are ONGC, Coal India and GAIL. Koushik Chatterjee, group executive director, Tata Steel, says his company will spend about 20% less on capex this year compared with Rs 13,500 last year. “A large part of the Kalinganagar project is complete but there will be some spends as we commission the unit and post that,” Chatterjee explained.

Ravi Uppal, MD & group CEO, Jindal Steel and Power, is looking to leverage its current capacity of 8 million tonnes before embarking on any expansion. “We will watch to see how the demand for steel grows and act accordingly,” Uppal says. JSPL’s net debt at the end of March 2015 was Rs 40,000 crore while the interest coverage fell to below 1.

Rakesh Arora, head of research, Macquarie Capital, points out that the capacity utilisation across sectors is around 70-75%. In some sectors, such as cement it is lower than 70% and with supply of more than 100 million tonnes coming into the steel sector, the current utilisation level of 75% could fall.

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