Meaningful Capex Recovery Only After FY20, Says India Ratings
Low capacity utilisation of stressed corporates could derail investment recovery for another 3 years.
Weak domestic consumption demand, global overcapacity and the adverse impact of Goods and Services Tax on working capital of businesses will leave capital expenditure subdued over the next two to three years.
Any meaningful capex recovery will only take place beyond financial year 2019-20, India Ratings said in a report.
Over the next two years, private capital expenditure will rise to Rs 1 lakh crore at a compounded annual growth rate of 5-8 percent, largely in the form of maintenance and essential upgrades of the non-stressed asset-heavy corporates, Priyanka Poddar, senior analyst, India Ratings and the lead author of the report noted.
Of the top 200 asset heavy companies, only 125 non-stressed companies will spend on maintenance while the remaining 75 may face “difficulties in undertaking even maintenance capex,” the report added.
Capacity utilisation of stressed corporates – as low as 40 percent – could derail the overall investment recovery for another three years, India Ratings said.
Asset Quality Pressures
The Reserve Bank of India has already identified stressed and asset-heavy companies which hold a large chunk of the banking sector’s Rs 8.8 lakh crore bad loans in two separate lists. These companies will be referred to insolvency proceedings if their debt restructuring fails. As work on addressing these stressed assets continue, the country continues to face an economic slowdown with private investments stagnant since 2015, India Ratings said.
While the resolution process should act as an encouragement for increased investment Under the Insolvency and Bankruptcy Code (IBC), consolidation of under-utilised capacity of these corporates could delay the overall recovery in investment, the report said.
Credit Availability Concerns
But even as companies work with turnaround strategies and increase their expenditure, the availability of credit may come in the way for some of them, according to India Ratings.
The rating agency points out that only the largest public and private sector lenders will be able to take some exposure to Indian corporates. Mid-sized public sector lenders are hit with severe asset quality issues and capital constraints while most mid-sized private sector lenders are not strategically geared toward providing adequate corporate credit.
Non-banking finance companies and the corporate bond market have a good opportunity to take over some of the gaps left behind by the banking system but these neither have the depth nor the risk appetite to provide adequate long-term funding to these companies.
“The growth of credit available from NBFCs and the bond market will be linear and not exponential as we had seen from some banks in the past,” said Udit Kariwala, senior analyst, India Ratings.
According to Kariwala, some of the issues facing the public sector banking system, such as bad loans, consolidation and capital constraints, will resolve themselves over the next two or three years, leading to greater participation of the banking system.
The contraction in private capex has necessitated increased spending by the government to keep the economy on its feet even as growth slumped the most in three years. India Ratings said public spending on capital expenditure may have increased in absolute terms but the growth and share as a percentage of gross domestic product has been falling. The public sector’s contribution to total capital formation was as low as 22 percent over FY12-16.
"Government spending alone will have limited ability to revive the investment cycle unless there is a sharp pick up in corporate capex demand," it said.
Rakesh Valecha, senior director and head of the core analytical group, India Ratings said that the turnaround in capital expenditure is likely to be led by companies from the automobile, telecom and oil and gas sectors. This is most likely because the share of non-stressed companies is higher than stressed companies in the sectors and the level of capacity utilisation is higher in auto, auto ancillary and oil and gas.
However, the growth in capital expenditure is likely to be gradual and depend on the pace at which stress resolution works through measures such as the IBC, Valecha said.