Are Manufacturing Sector Balance Sheets Looking Stronger? RBI Data Suggests So

There are signs that India’s non-government manufacturing companies are de-leveraging faster, which could portend well for a new investment cycle, even though short-term pressure on sales will continue to weigh on any immediate plans for capital expenditure.

India’s manufacturing companies have seen an increase in ‘reserves and surplus’, set aside more money for ‘fixed assets’ and cut down on long-term borrowings, shows data from the Reserve Bank of India’s study of 1,539 listed private manufacturing companies. The data was released by the central bank yesterday.

The data shows that:

• The ‘reserves and surplus’ category made up 34.4 percent of the sources of funds for these companies in the first half of 2019-20 compared with 32.4 percent a year ago.
• Long-term borrowings which accounted for 6 percent of the source of funds in the first half of last year has reduced to zero in the comparable period this year.
• Similarly, short-term borrowings which made up 14.2 percent of the sources of funds in the first half last year came down to zero this year.

When these manufacturing companies were analysed by the ‘uses of funds’, it showed an increase in fixed assets and cash holdings.

• Fixed assets, including capital work in progress, accounted for 45.6 percent of the use of funds in the first half of the current financial year, a sharp jump compared to 18.9 percent last year.
• Cash and cash equivalents rose to 4.8 percent of the use of funds compared to zero last year.
• The data also showed that available funds were used to bring down liabilities. Payments towards long-term borrowings accounted for 11 percent of the use of funds in the first half of this year compared to zero last year.
• Similarly, reducing short-term borrowings used up 4.2 percent of available funds in the first half of this year compared to zero last year.

The Macro Implications

The RBI, in its release accompanying the data, said that funds mobilised by listed private manufacturing companies were mainly used for fixed assets formation and deleveraging.

“These companies were investing in financial instruments such as investment and extending loans and advances during the last couple of years in the face of subdued demand,” the RBI said. “This shift in investment was found to be broad-based.”

RBI Governor Shaktikanta Das cited the data as one indicator of a possible turn in the capex cycle in the minutes of the December monetary policy committee meet released yesterday. There are also some indications that the capex cycle may be turning up as reflected in an increase in the share of funds deployed in fixed assets, Das wrote.

Das also pointed to an increase in the total cost of projects sanctioned in the private sector by banks/financial institutions to Rs 79,525 crore in the second quarter of 2019-20 from Rs 45,781 crore in the first quarter.

“These are positive developments but need to be carefully assessed with incoming data for their sustainability,” Das wrote.

No Quick Turnaround?

Economists, however, caution that any quick turnaround in the capex cycle is unlikely even if corporate balance sheets are healthier.

Capacity utilisation fell to 68.9 percent in the second quarter of 2019-20 from 73.6 percent in the first quarter, show the early results of the Reserve Bank’s capacity utilisation survey.

“In our view, a broad-based pickup in capacity expansion will set in once there is clearer visibility of a demand revival,” said Aditi Nayar, principal economist at ICRA.

Rahul Bajoria, chief India economist at Barclays, said that deleveraging would be a sign of corporate balance sheet repair, but it also needs to be seen in the context of revenue growth. That remains weak.

The data released by RBI shows that weakening demand hurt revenue growth of the manufacturing corporations surveyed.