Slowdown hits cos gross capital formation

Written by Pradip Kumar Dey | Mumbai | Updated: Apr 12 2011, 07:28am hrs
The global slowdown took a toll on the gross capital formation (GCF) of some companies during 2009-10, indicating that the productive capacity of these corporates dropped in the year.

An FE analysis of 25 major business houses which comprises 161 companies show that GCF of these groups together dropped from R1.69 lakh crore in 2008-09 to around R81,532 crore in 2009-10. GCF is measured by the investments in plant and equipment, construction and raw materials and inventories. The analysis also shows that the share of gross fixed assets formation (GFAF) in GCF decreased from 98.7% in 2008-09 to 73.66% in 2009-10. On the other hand, the rate of GCF decreased from 31.13% to 11.45% during the same period. Net capital formation also shows a similar trend, decreasing from R1.46 lakh crore to R51,742 crore. Gross and net capital formation is obtained by adding increases in gross or net fixed assets and inventories. Analysts say the growth of the productive capacity of a company depends on its rate of capital accumulation. The higher the rate of capital accumulation, the higher would be the growth of the productive capacity of the company and paucity would lead to low level of production with higher cost. Capital formation assumes paramount importance in the context of company strategies.

The list of 25 houses with more than R4,350 crore gross block are considered for this study. The basic data compiled are based on audited annual accounts for the period April to March 31 in the respective years 2007-08, 2008-09 and 2009-10. The analysis shows that Mukesh Ambani's group leads the ranking chart based on GCF followed by the Tata group. For components, GFAF constituting the bulk of GCF, steadily decreased from about R1.67 lakh crore in 2008-09 to R60,055 crore in 2009-10. The inventory accumulation increased from R2,204 crore to R21,478 crore. The share of inventory accumulation in GCF increased from 1.30% to 26.34% during the same period.

Net capital formation (NCF) decreased to R51,742 crore during 2009-10 from R1.46 lakh crore during 2008-09. In 2009-10, net fixed assets formation (NFAF) constituted 59.5% as compared with 98.5% in 2008-09 of the NCF. In case of components, the GFAF rate decreased from 35.25% to 9.38%. The inventory accumulation rate increased from 3.17% in 2008-09 to 29.89 % in 2009-10. The study also shows that in the year 2009-10, when the GFAF rate (9.38%) was slightly lower than the corresponding GCF rate (11.45%), the rate of inventory accumulation rate ( 29.89%) was significantly higher than the corresponding rate of GFAF. The rate of NCF decreased from 36.44% in 2008-09 to 9.49% in 2009-10. The NCF rate of 9.49% was lower than the corresponding rate of GCF and the highest rate of 36.44% in 2008-09 was higher than the corresponding rate of GCF.