Capex revival some way off

By: | Published: August 7, 2015 1:19 AM

Any meaningful recovery in capital investment is still a couple of years away as the private sector continues to shy away from investments and utilisation rates in most sectors slip to five-year lows...

Any meaningful recovery in capital investment is still a couple of years away as the private sector continues to shy away from investments and utilisation rates in most sectors slip to five-year lows, says ratings agency Crisil. While investments — private and public — are on a downward trajectory and tipped to come off by 2% this year, those in the private sector are tipped to fall for the third year running, posting a drop of 8%. Pertinently, in many sectors utilisation levels are well below peak levels.

The current utilisation rates in sectors like cement, fertilisers, steel, aluminium, commercial vehicles, tractors and two-wheelers are at five-year lows. “Till the gap narrows, it is very difficult to envisage a broad-based pick-up in the capex cycle,” the report says. Industrial capex — accounting for close to 30% of aggregate capital investments — is expected to decline sharply by 16% this fiscal, mainly due to low utilisation rates. On the other hand, infrastructure investments will grow at a moderate 4% helped by favourable policy changes and higher budgetary allocations — allocations in the last Budget were higher by 50%. Infrastructure output growth slowed to 3% in June from 4.4% in May.

The slow pace of reforms has been hitting the bottom lines of infrastructure players, pointing to weak industrial growth. Larsen & Toubro, a bellwether for the Indian economy, saw a 37% decline in its first quarter net profit last week. L&T said the investment climate remained weak on the back of “global uncertainties and the unhurried pace of reforms in India”.

Despite all efforts by the government to boost infrastructure creation in the country, lacklustre private sector interest and poor financial health of infrastructure developers and construction companies is preventing the recovery.

Aggregate of the financials of 40 infrastructure and construction companies showed that the average gearing or debt to equity ratio has doubled in the last five years to 2.2 times as of March 2015. Also, with high leverage levels and a weak business cycle, companies are finding it harder to service debts, as a result of which the interest coverage ratios have come down to just about 1.9 times in fiscal 2015 from 5.6 times in 2010.

While green shoots are visible in investments into infrastructure segments such as urban infrastructure, national highways and renewable energy, investments continue to elude large sectors like power generation, aluminium, steel, cement and refining and marketing.

Crisil predicts that it will take about a year to “clean up” and private participation to begin. “A meaningful recovery in capital investments will be visible from fiscal 2017 — which is when the investments are expected to increase by 7%,” the agency said.

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