Investments in new projects came off in the three months to June, compared with the three previous quarters, CMIE data showed. While some of the drop in value could be attributed to lower inflation reflecting in lower input costs, the fact is that the volume of projects also fell. What’s encouraging is that the quantum of stalled investments continued to fall, across private and government projects and across states. This was the fifth consecutive quarter over which stalled projects have fallen with the ‘unstalling’ being faster for government projects.
That ties in with the rising government spends in the first couple of months of the fiscal; the government spent 13% of the FY16 budgeted plan expenditure in April-May compared with 10% in the same period last year. Critically, non-plan expenditure dropped 9% y-o-y while plan expenditure rose 4% y-o-y; the capital component of plan spends climbed an impressive 32% y-o-y.
So while companies aren’t rushing to add new capacity as is clear from the credit offtake — loan growth shrank by 3.32% or R2.25 lakh crore between April 3 and June 12 — the revival in stalled projects could kickstart the capex cycle.
As HSBC points out, “unstalling activity has reached a critical mass and coincided conveniently with the nascent spurt in central government capex, both focussing on specific sectors — roads and rails”.
It believes that at this early stage of the cycle, activity arising from unstalled projects is sufficient to lift investments, and estimates that since March 2014, projects worth about 2% of GDP have been unstalled.
While most of India Inc, especially players in the infrastructure, steel and power sectors, remain highly leveraged, several public sector companies are throwing up cash. Deutsche Bank estimates that the operating cash flows and free cash flows of listed PSUs increased to a historical high of $34 billion and $9 billion respectively, which it believes could drive fresh capex of $60 billion of large projects over FY16-18. While much of this is driven by improved cash flows of oil marketing companies, other PSUs too are generating a fair amount of cash.
However, government spending alone may not be enough to drive all segments of the economy. So far the spends have been mainly on roads and railways and, therefore, may not show up in the order books of most capital goods companies.
The manufacturing PMI data for June, for instance, showed order flows lost momentum, including those from exports. Indeed, the falling order to inventory ratio indicates manufacturing could slow down further in the coming months. Also, data collated by Emkay shows the value of tenders issued in May 2015 went up 62% y-o-y to Rs 35,070 crore but the value of contracts awarded came down by more than 37% to Rs 15,300 crore.
While Larsen and Toubro reported strong order inflows in FY15 up 22%, a big chunk came from overseas markets and BHEL’s order backlog at the end of March 2015, was virtually flat compared with the previous year.
MS Unnikrishnan, MD, Thermax, confirmed an absence of traction of larger orders from core industries. “The inflow of inquiries for larger projects in the cement industry, steel industry, fertilisers is not anything remarkable to report at this time,” he observed.
He does not expect a quick revival of these sectors in the the first or the second quarters of FY16. He added that while there is capacity pooling in sectors such as food processing, consumer durables and textiles, orders from these were not enough to “move the needle” for capital goods players.