ADVERTISEMENT

Bottoming Out Of Capex Cycle; Acceleration Dependent On Meaningful Macro Improvements

Capex spending by top 200 asset-heavy companies to increase by 5-8% over the next two years.

Indian two thousand and five hundred rupee banknotes are arranged for a photograph in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)  
Indian two thousand and five hundred rupee banknotes are arranged for a photograph in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)  

India Ratings and Research expects capex spending by top 200 asset-heavy corporates to increase at a compounded annual growth of 5-8 percent over 2017-18 to 2019-20, primarily in the form of maintenance capex.

Non-stressed corporates are likely to be contributors to capex beyond 2019-20, while capex spending by stressed corporates is likely to be muted. Contribution to the total capex by non-stressed corporates in 2015-16 to 2016-17 was 80 percent.

The stressed corporates have a limited ability to undertake any meaningful capex activity over the next five-to-seven years owing to weak credit metrics as indicated by interest cover of 0.5 times and net leverage of 17.8 times, along with an 8 percent decline in operating profit, said India Ratings.

The efficiency ratio/capacity utilisation of the top 200 asset-heavy corporates is expected to remain at 2014-15 to 2016-17 levels of 65-70 percent over 2017-18 to 2019-20 owing to global overcapacity and transition to the Goods and Services Tax regime. Moreover, utilisation levels are likely to be impacted by stagnant demand growth as reflected by a 9 percent growth in nominal private final consumption expenditure in in the first half of FY18 compared with a double-digit growth in FY17. Export demand registered a yearly growth of 7 percent during April-November 2017, similar to growth levels witnessed in April-November 2016.

While non-stressed corporates achieved high capacity utilisation of 75-80 percent in FY17, the presence of stressed corporates with low capacity utilisation of 40-45 percent could lead to an increase in merger and acquisition activities across sectors under the Insolvency and Bankruptcy Code over FY19-FY20, resulting in delay in any significant greenfield capex.

Infrastructure, metals and mining, and power sectors, which registered high leverage (9-10 times) and a significantly lower capacity utilisation of 20-30 percent in FY17 from the peak 2005-06 levels of 80-90 percent, could lower their capex spending over FY18-FY20 compared with oil and gas, auto, and telecom sectors. Low plant load factor and decline in power purchase agreements have led to a yearly decline of 2 percent in private sector investments in the power sector.

As per India Ratings’ analysis, 75 percent of the top capex spenders belong to ‘AAA’ and ‘AA’ rated categories.

The agency believes that under the government’s proposed bank recapitalisation plan, the quantum of capital injection in public sector banks and mobilisation of capital should largely cover the provisioning shortfall for stressed assets and address issues pertaining to non-performing assets.

The capital injection may also support modest growth in advances but is unlikely to support any significant investment demand by corporates. Therefore, bond market and non-banking financial companies are likely to be an alternate source of capex funding. However, weak appetite of capital markets and non-banking financial companies to absorb long-term funding requirement of infrastructure companies and the recent increase in bond yields are likely to result in demand constraints.

As per India Ratings’ capex cycle report published in October 2017, growth in government (central and state) capital spending on capex and share of spending as a percentage of nominal gross domestic product have been decelerating.

The agency believes, given the limited scope of additional fiscal spending boost, incremental government support is likely to fall short of requirement for a meaningful improvement in private capex.

On the other hand, the Bharatmala Pariyojana, the second biggest highway development programme after the National Highways Development Programme announced in October 2017, could pose a challenge for the government due to their ambitious expectation of private participation through public private partnership of about Rs 1.06 lakh crore in a scenario of continued stretched balance sheets of many infrastructure developers. The agency believes the implementation of the Bharatmala Pariyojana would also depend upon fast tracking of land acquisitions, clearances from the Ministry of Environment, Forest and Climate Change and other clearances.

According to the latest Centre for Monitoring the Indian Economy’s data, new investment proposals by government and private sector declined 53 percent year-on-year and 56 percent year-on-year, respectively, in April-December period in the current financial year, and were the lowest in a decade. The share of government in new investments announcement was 49 percent from April-December in the current year. Also, stalled government projects increased 54 percent on a yearly basis in the first nine months of FY18; however, the private sector witnessed a 5 percent yearly dip in stalled projects.

India Ratings and Research, a wholly owned subsidiary of Fitch Group, is a SEBI and RBI accredited credit rating agency operating in the Indian credit market.