Private sector investments running out of steam: CRISIL

CRISIL Research has come out with its report on private sector. According to the research fir, investment in the infrastructure sector is expected to decline by 6%, capex in industrial/services sectors is expected to fall by an even sharper 10%.

Private sector capex to slump in FY13
To delay economic revival

• India Inc’s capital expenditure will dip by 14% in 2012-13, which will also be reflected in the slowest growth in fixed asset base in the past four years. At 35%, the decline will be far steeper in private sector investments.
• Less than one-fourth of the total planned capex in 2012-13 is towards new projects. Close to half of those polled also said they have no intention of starting any new project this year. Such a subdued investment climate will mar the prospects of an early economic recovery.
• Over 70% of those polled identified policy inaction/lack of speedy clearances for projects among the top two factors responsible for the current slowdown. Lack of funding was seen as the least hindrance.

The private sector accounts for over three-fourth of India’s GDP and over 90% of manufacturing output. Revival of the private sector investment/capex cycle is possibly, therefore, very critical to lift sagging growth. This is all the more imperative since the government sector – government stimulus supported growth post the global financial crisis in 2008-2010 – is facing increasing constraints given its widening fiscal deficit (see the recent CRISIL commentary ‘Why is it critical to revive the private sector’). The macro data (gross fixed capital formation or GFCF) started showing signs of slowdown in the investment cycle a few quarters ago, but concerns were publicly expressed by both government and industry when growth in GFCF turned negative in the September and December quarters of 2011-12.

Recent GDP and IIP data indicate that the economic environment is weakening further. Public comments by leading corporates on the state of the economy and future economic recovery too have been generally pessimistic, and reflect a degree of uncertainty that has perhaps not been seen since the global financial crisis. It is in these circumstances that CRISIL Research decided to talk to companies directly to understand first-hand what is happening to capital investments, which is so critical for revival of growth. We polled about 200 companies that together account for around 70% of the market capitalisation of all companies in the S&P CNX 500 (excluding banking and financial services companies).

Slump in capital spending by India Inc to accentuate

With the continued weak investment climate, capital expenditure by corporates is slated to slow down further. At Rs 2.7 trillion, the planned capital investment in 2012-13 for the polled sample of about 200 companies is lower by 14% compared to the previous year. The decline comes over and above a 4% fall in capex in 2011-12. The slowdown in capital investments is also reflected in a mere 12% growth in fixed asset base in 2012-13, the slowest in the past four years.

The collapse in private sector capex is the most significant finding of our research and survey. The capex by private sector companies that participated in our survey is expected to dip by nearly 35% (Rs 720 billion) in 2012-13, even on the back of a flat 2011-12. By contrast, public sector entities indicated that they expect capex to go up by 27% in 2012-13. Capital investment by public sector companies polled showed a 6% decline in 2011-12. In our view, policy-related issues, weak economic outlook and an uncertain global environment all pose a downside risk to even these planned estimates.

Investments to slow down in cement, textiles, telecom and automobiles
To evaluate capex trends at the sector level, we compared the planned capex in 2012-13 with the annual average over the last three years (2009-12) to smoothen out year-on-year variations. This exercise revealed that the fall is broad-based, across infrastructure and industrial/services sectors. While investment in the infrastructure sector (includes oil & gas, telecom, power, roads, ports and airports) is expected to decline by 6%, capex in industrial/services sectors is expected to fall by an even sharper 10%. Notably, private sector investment in the infrastructure sector is expected to see a sharp drop of over 30%.

In terms of individual sectors, investments are slowing down considerably in cement, textiles, telecom, and automobiles. In case of cement, the sector is nearing the end of a prolonged capex cycle. Large capacity additions over the past 3-4 years have led to a significant drop in utilisation rates and capital investments are expected to be much lower compared to the past. In telecom, we believe that investments have been affected by the lack of policy clarity and, in some cases, stretched financials of companies after the acquisition of 3G / BWA licences. In automobiles, significant investments already made by most large players coupled with demand slowdown in certain segments are causing a dip in future investments. It is pertinent to mention here that many auto firms have announced large capex for diesel vehicles, but the actual spend is not likely to be large in 2012-13.

In contrast, metals and certain infrastructure sectors (roads, ports and power) will see growth in capex compared to the average for the past 3 years. However, polled companies that are part of these sectors indicated that a large part of their originally planned capex is being deferred. In infrastructure, large investment by public sector companies is supporting capex growth. Moreover, given the long project implementation cycle in these sectors, a large part of the investments is likely to be towards ongoing projects.

Disclaimer: CRISIL Research, a division of CRISIL Limited (CRISIL), has taken due care and caution in preparing this Report based on the information obtained by CRISIL from sources which it considers reliable (Data). However, CRISIL does not guarantee the accuracy, adequacy or completeness of the Data / Report and is not responsible for any errors or omissions or for the results obtained from the use of Data / Report. This Report is not a
recommendation to invest / disinvest in any company covered in the Report. CRISIL especially states that it has no financial liability whatsoever to the subscribers / users / transmitters / distributors of this Report. CRISIL Research operates independently of, and does not have access to information obtained by CRISIL’s Ratings Division / CRISIL Risk and Infrastructure Solutions Limited (CRIS), which may, in their regular operations, obtain information of a confidential nature. The views expressed in this Report are that of CRISIL Research and not of CRISIL’s Ratings Division / CRIS. No part of this Report may be published / reproduced in any form without CRISIL’s prior written approval.

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