Indian companies probably won’t invest in additional capacity for at least another year as the private sector struggles with sluggish domestic demand and growing protectionism overseas, according to the nation’s largest engineering firm.
Indian companies probably won’t invest in additional capacity for at least another year as the private sector struggles with sluggish domestic demand and growing protectionism overseas, according to the nation’s largest engineering firm. “The private sector has excess capacity and markets have shrunk as compared to their plan when these capacities were put up,” said R. Shankar Raman, the chief financial officer of Larsen & Toubro Ltd., Asia’s most-valuable construction company. “To expect the private sector to put up additional capacity and have larger capacity underutilized does not seem economically feasible for the next one to two years.” India boasts the fastest growth among major economies, yet credit to companies is expanding at the slowest pace in a quarter century given corporate indebtedness and lenders battling bad loans. The consumption picture also was muddied after the government’s November decision to cancel 86 percent of currency in circulation led to a cash crunch. The onus for kick-starting spending has fallen to Prime Minister Narendra Modi’s administration, which is pushing companies to ‘Make in India’ and allocated $59 billion for infrastructure in its recent budget.
L&T, which draws nearly half its revenues from infrastructure and has businesses spanning information technology, financial services and defense, is considered a proxy for the broader economy. Capacity utilization for companies has to increase to about 85 percent from current levels around 65 percent, and international trade needs to also improve for firms consider adding facilities, Raman said.
The Mumbai-based company in January cut its revenue and order-inflow guidance for the financial year ending March 31 amid delays in project clearances and bidding for anticipated orders as well as weak investment momentum. L&T’s margins contracted to 11 percent for the period ended March 31, 2016 from 13 percent in 2011, data compiled by Bloomberg show.
Raman said a 13 percent operating margin reflected “good times” and wasn’t sustainable, and 11 percent earnings before interest, tax, depreciation and amortization was “decent.”
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The company has ended contracts for 14,000 temporary workers and sold assets to ensure profitability, Raman said in an interview in Mumbai. It is in the process of getting clearances for the sale of Kattupalli Port in Tamil Nadu and also plans to divest from a power plant in Punjab.
“We are using the slowdown to internally focus, to make sure our efficiency goes up, profitability will sustain only if we go thinner on cost,” he said.
Still, the company remains confident of doubling revenues over the next five years and has planned for two years of consolidation and modest growth, followed by three years of a stronger expansion. L&T shares climbed 0.8 percent to 1,488.65 rupees in Mumbai on Friday.
The pace at which the government converts its allocations into projects and contracts would be the biggest “kicker for revival” of investments, Raman said.
“The next six months could see revival of some domestic consumption leading to better demand, better capacity utilization and somewhere in the middle of following year 2018-19, capacity creation at private sector will get to be spoken about,” he added.