Investment slide continues, capacity utilisation down to five-year low

By: | Updated: August 7, 2015 8:19 AM

Low capacity utilisation is the key challenge faced by most industrial sectors.

capacity utilisation, industrial sectorsLow capacity utilisation is the key challenge faced by most industrial sectors. For 10 out of 12 large industrial sectors analysed, current capacity utilisation is lower than their 5-year average. (Reuters)

While the NDA government is putting all its muscle to revive stalled projects and kickstart investments, a study by rating firm Crisil has revealed that the slide in investments is continuing —with a 2 per cent decline likely in the current fiscal — and capacity utilisation is floundering at five-year lows.

What’s more worrying is that private investments — on skid row since the last couple of years —are expected to decline another 8 per cent this fiscal, it said.

“Utilisation rates in 10 out of 12 large industrial sectors are wallowing at 5-year lows causing new project announcements to dry up. Consequently, fresh investments (projects announced / awarded in past 1 year) are expected to account for a mere 20 per cent of total investments,” Crisil said.

As a result, a meaningful recovery in capital investments will only be visible from fiscal 2017, when Crisil expects to see a 7 per cent increase.

“Industrial capex, which accounts for close to 30 per cent of aggregate capital investments, is expected to decline sharply by 16 per cent this fiscal, mainly due to low utilisation rates. On the other hand, infrastructure investments will grow at a moderate 4 per cent helped by favourable policy changes and higher (50 per cent higher) budgetary allocations, it said.

Low capacity utilisation is the key challenge faced by most industrial sectors. For 10 out of 12 large industrial sectors analysed, current capacity utilisation is lower than their 5-year average. “For instance, in the metals space — particularly steel and aluminium — India has created surplus capacities in the last few years and is turning into a net exporter from being a net importer. In addition, sectors such as refining & marketing and petrochemicals are also being affected due to the global decline in commodity prices,” Crisil said.

Apart from paper, most sectors are very close to their 5-year lows in term of capacity utilisation, and still some time away from their peak utilisation rates. Till the gap narrows, it very difficult to envisage a broad-based pick-up in the capex cycle. “New project announcements have dried up completely for these sectors. As a result, fresh investments (projects announced or awarded in the last one year) are expected to account for a mere 20 per cent of total investments in the next couple of years with the rest flowing towards ongoing or legacy projects,” Crisil said.

Probably the two exceptions among industrial sectors are automobiles and fertilisers, where Crisil expects investments to witness a healthy increase. In the case of fertilisers, private announcements have increased after a long lull as the new urea investment policy provides a higher upside to project returns. “For automobiles, especially the passenger cars segment, the demand outlook has improved with a drop in fuel prices and interest rates,” it said.

In the case of infrastructure, Crisil says the scenario is quite the reverse — with power generation being the only segment expected to see a decline in investments. Thermal power capacity additions are expected to decline from 40,000 mw in the last two years to 36,000 mw in the next two. No new project announcements are being made because of stretched financials of private developers and lack of fresh power purchase agreements on account of the weak financial health of discoms.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Switch to Hindi Edition