Firms go slow on capex as demand, cash flow down

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Mumbai | Updated: Nov 02, 2015 11:56 AM

From Cairn India to Hero MotoCorp, a clutch of corporates is cutting back on capex.

indian rupee vs us dollarCapex is unlikely to pick up in sectors such as steel where, together with anaemic demand, cheap imports are driving down prices.

From Cairn India to Hero MotoCorp, a clutch of corporates is cutting back on capex. With cash flows under stress, and visibility on demand poor, much of India Inc is reluctant to add capacity and even those that had proposed to do so might just postpone the plan or prune it. The management at Hero MotoCorp, for instance, said after it announced the Q2FY16 numbers that the allocation of Rs 3,000 crore for FY16 and FY17 would now spill over to FY18. Hero’s volumes for the three months to September came off by about 7% year-on-year as consumption in rural India remained weak. Meanwhile, with its realisations under pressure, Cairn will now spend $300 million against the planned $500 million.

As such, capex by companies in the private sector will remain subdued this year as indicated in an assessment made by FE in late June which indicated that for a group of top 17 firms it would fall by about 3% to Rs 2.8 lakh crore. The collective capex guidance of top three steel producers,- SAIL, Tata Steel and JSW Steel – at close to Rs 23,500 crore, remains 8% lower than in FY15.

Manufacturers of capital goods continue to hurt from the slowdown in the investment cycle. Heavyweight Larsen & Toubro slashed its order inflows guidance to 5-7% for FY16 from 15% earlier with  R Shankar Raman, CFO, pointing out excess capacity in many sectors had left investment momentum slow despite efforts from various stakeholders. “Companies are worried about efficient utilization rather than investing in new capacities,” Shankar Raman observed.


Thermax’s orderbook fell 20% year-on-year in the three months to September to Rs 4,000 crore as inflows dropped 26% to Rs 810 crore, lower than the long-term quarterly run rate of Rs 1,000 crore. As a result, company’s revenues fell 9% while earnings came off by 25% year-on-year.

M S Unnikrishnan, MD & CEO of Thermax, confirmed the absence of any traction in larger orders from core industries like power, steel, fertilizers and oil & gas saying activity remain stagnant. “There is no capacity addition for these sectors since many companies are operating at a capacity utilisation of 60-70%,”Unnikrishnan observed.

The CEO believes the way things are, the situation may not improve for the next two years.

Last week, Vedanta Ltd which reported a more than 35% yoy drop in its net profit for a second consecutive quarter lowered FY16 consolidated capex guidance by 30% to $700 million—half of what it spent in FY15. Vedanta has temporarily shut two of its aluminium facilities and deferred ramping up of capacity at BALCO capacity to maximise cash flows even as it grapples with Rs 73,000 crore ($12 billion) of borrowings.

Capex is unlikely to pick up in sectors such as steel where, together with anaemic demand, cheap imports are driving down prices. As Seshagiri Rao Joint MD and Group CFO, JSW Steel, points out imports have jumped 42% and are outpacing the rise in consumption. “The industry is hurting not because of slowing demand but more because steel is being dumped by China,” Rao explains pointing out that if imports were not at such elevated levels, capacity utilisation locally would go up. Although the firm’s profits plummeted from Rs 1,405 crore in HIFY15 to to Rs 10 crore for the same period in FY16, JSW Steel plans to spend Rs 9,000 crore in the next two years to increase capacity from 14 million tonnes to 18 million tonnes. Rao believes there is a pick up in activity in metro projects, mining, water pipelines and the commercial vehicle segment and therefore demand isn’t as bad as perceived. Consumption of steel in the first half of FY16 rose 4.2%.

While large public sector undertakings (PSUs) typically invest large sums every year some like PowerGrid and IOCL indicate spends will be flat. Among those that may increase capex are ONGC, Coal India and GAIL. NTPC , which had earlier pruned its allocation has now upped the guidance from Rs 21,000 crore to Rs 25,000 crore mainly for its solar plants in Andhra Pradesh and Madhya Pradesh. Telcos such as Idea Cellular and Bharti Airtel are expected to continue to invest as they had planned.

Already, gross fixed capital formation, a measure of investment in the economy has fallen over the last few years from 33.64 % of GDP in FY12 to 28.72% of GDP in FY-15. While the capital goods segment, within the IIP jumped 10% year-on-year in July and 21% year-on-year in August, the numbers come off very small bases since the segment had de-grown both in July and August 2014.

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