Corporate India’s inventory levels are yet to fall to the relatively healthy levels reported before the pandemic, leave alone the still lower levels seen in the economy’s high growth phase during the first decade of the millennium.
At 65.4%, the inventory-to-sales ratio among companies in Q4FY24 was even higher than the year-ago level of 64.1%; the year-on-year rise in the ratio was even steeper for the previous two quarters of the last fiscal. This signals the persisting weakness of the consumption demand.
Recently, in an article which was part of the Reserve Bank of India’s monthly bulletin for August 2024, the authors had cited high capacity utilisation, healthy corporate balance sheets and sustained credit demand as reflective of “conducive environment for private corporates to undertake investments going forward”.
While the inventory-to-sales ratio peaked at 113.8% in Q1FY21 during the heights of Covid pandemic, it remained largely range-bound between 49% to 55% from FY08 to FY19, according to the Reserve Bank of India’s survey.
The ratio remained above 60% for nine quarters in a row till Q4 last fiscal, indicating that many companies in critical sectors may have to go slow on production and new investment projects, to ease inventories with dealers.
The RBI data showed that the total number of companies surveyed increased to 803 in the three months to March this year from the lows of 145 in March 2020, meaning more firms including small and medium enterprises have been included in the survey. However, during the early years of the survey the number of companies surveyed were even higher — it stood at 1,386 during the quarter ended September 2008, for instance.
Suman Chowdhury, executive director and chief economist at Acuité Ratings & Research, noted that inventory build-up has been reported in the automotive sector, particularly in the passenger vehicle segment. He, however, said such inventory build-up may be a “transitory phenomenon” due to the impact of the general election and extreme heat conditions during the April-June period. “We expect stronger demand conditions during the upcoming festive season in the second and third quarter, which should reduce the inventory levels,” Chowdhury added.
In fact, the capacity utilisation rate has consistently remained above 70% from the third quarter of FY22 after hitting the lowest level of 47% in the first quarter of FY21. Capacity utilisation peaked at 83.2% in the fourth quarter of FY11.
Experts said the high the inventory-to-sales ratio, coupled with particularly subdued new order bookings in recent quarters, discounts the optimism that a 44-quarter aggregate high capacity utilisation level of 76.8% posted by companies in Q4FY24 would soon herald a robust investment cycle.
However, Anitha Rangan, economist, Equirus Securities, said considering the recent trends, especially the fallout of the pandemic and slowdown in consumption, the signs are welcome. “Alongside, we are also witnessing a recovery in private capex in new-age sectors like renewable energy, and in areas like roads, transport, electronics and food processing. In traditional sectors like cement, metals, textiles, the wait may turn out to be longer,” she said.
Paras Jasrai, senior analyst, India Ratings, underlined that the higher capacity utilisation reflects improving investment demand from the private sector. “However, it is still early to call it a sustainable one as we have seen it fluctuate lower in the last few quarters (post March 2023). Nevertheless, this is encouraging and we expect it to hold up in this year with improving consumption demand in FY25,” he said.