There is a buzz being created of late about a possible revival in the private capacity expansion cycle. Some macro data point in this direction.

But a look at the numbers of India Inc shows that only a handful of private sector players are investing in expanding capacities, besides the public sector behemoths in oil and gas, metals and mining segment.

Most private sector players had postponed their plans to increase capacities due to factors such as a demand slowdown, mounting debt, and regulatory issues stalling projects.

But the RBI’s OBICUS (Order Book, Inventories and Capacity Utilisation Survey) indicated that the capacity utilisation of manufacturing companies had increased to an average of 74.3 per cent between the December 2017 and June 2018 quarters. The new order book of companies also grew 43 per cent in the June 2018 quarter, compared to a year ago. Improvements in the IIP capital goods index and Nikkei manufacturing PMI, too, seem to indicate rising manufacturing activity.

But these numbers are driven by, “one, machinery orders from government; two, capex by smaller sectors such as food processing and automotive; and three, ongoing maintenance expenditure of manufacturing companies,” says Dhananjay Sinha, Head of Research, Emkay Global.

An analysis of the additions to the tangible fixed assets of the companies forming part of the Nifty 500 basket shows that just a few had increased capacities in the first half of FY19.

RIL leads the show

The fixed assets of the companies with comparable numbers in FY17 grew 8 per cent in the first six months of FY19 compared to the corresponding period in FY18. But almost one-third of the increase was contributed by Reliance Industries Ltd (RIL). The net tangible fixed assets of RIL increased a whopping ₹80,631 crore in the first two quarters of this fiscal. The ongoing investments in its hydrocarbon business, oil and gas exploration, retail arm and telecommunication venture Reliance Jio appear to be behind this surge.

This fiscal, Tata Steel’s assets received a boost due to the consolidation of Bhushan Steel’s plants in its books. In a bid to improve its power transmission network, Adani Transmission has been bumping up its investment. Bharti Airtel is also investing extensively in improving its network and connectivity to take on RJio.

But besides these select names, the capex of India Inc is mainly led by PSU majors. Companies such as IOCL, NTPC, Power Grid Corporation, ONGC, BPCL, HPCL and Coal India jointly invested around ₹80,000 crore in the June and September quarters of 2018.

With these giants owning a chunk of the tangible assets of the listed universe, operational expenses towards maintenance could account for a big portion of this addition.

 

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What’s ahead?

So, what lies ahead for private capex in FY20? Kapil Gupta, Economist at Edelweiss Research, explains: “We believe the government is facing the impossible trinity of sticking to fiscal consolidation, sustaining higher capex growth and continuing rural spending. In our view, fiscal expansion will not be imprudent. Given the election cycle, farm loan waivers will take precedence over capex spending. Already, the government’s capex spend in Q3 FY19 has slowed sharply, which does not augur well for the business cycle.”

Emkay Global’s Sinha thinks the key manufacturing sectors such as cement, steel, non-ferrous, hydro carbons and power that drive large private capex are yet to hit capacity utilisation levels that can drive new capex. Also, the banking NPA cycle is far from over. Consolidation and M&A opportunities presented by recent bankruptcies are also delaying capex revival as cash rich corporates opt for inorganic growth. Until these issues are resolved, a meaningful recovery in the capex cycle will be difficult.

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