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Corporate capex recovery delayed further, says Ind-Ra

Highly leveraged stressed companies will drag down investment recovery, says India Ratings & Research.

, ET Bureau|
Updated: Oct 10, 2017, 08.07 PM IST
The gap between stronger and weaker companies is widening over the years.
The gap between stronger and weaker companies is widening over the years.
Mumbai: The much awaited recovery in corporate capital expenditure in India has been delayed further and is now expected to happen only in the fiscal year ended 2021 two years later than earlier thought as highly leveraged stressed companies will drag down investment recovery, India Ratings & Research (Ind-Ra) said in a report on Tuesday.

“During the period, maintenance spending will be incurred by the 125 non-stressed corporates of the top 200 asset-heavy corporates. The capex of these corporates expanded at a 10% CAGR over FY12-FY17... However, the 75 stressed corporates, which registered negative 11% capex CAGR for FY12-FY17 and are from key investment-linked sectors, such as metals and mining, infrastructure, and power, may not even be in a position to incur maintenance capex. Thus, they are likely to drag down the investment recovery for another two-three years,” Ind-Ra said in a note.

Ind-Ra said that the 125 non-stressed companies represent 85% of the capex spending of the top 200 corporates over FY12-FY17, with a capacity utilisation of 75%-80%. These companies will have to manage the burden of recovery because stressed companies are fighting for survival.

“The gap between stronger and weaker companies is widening over the years. Auto and oil and gas are only the sectors where the capital utilisation is at 100% whereas metals, infrastructure and power are grappling with leverage and so are not expected to spend soon,” said Priyanka Poddar, senior analyst at Ind-Ra.

Ind-Ra expects capacity utilisation for auto and automotive supplier and oil and gas to stay around current levels of 143% and 100% respectively. However, sectors like metals and mining, infrastructure and power are grappling with capacity utilisation of around 60%.

Higher capacity utilisation is considered to be a precursor to capital expenditure by companies as it means that the existing production is at full tilt and companies have to invest in fresh capacity.

Ind-Ra said the stress in debt laden companies means that it could take another 10-11 years for such corporates to deleverage to a sustainable level. “In a scenario where overall capacity utilisation (aggregated for the top 200 capex spenders) continues to remain at 60%-65%, the 5 times median net leverage (highest since FY05), muted demand growth and weak pace of nominal growth recovery (resulting in low EBITDA), capex activity may not revive even in the next seven-nine years.”

This delay could also mean that GDP growth may not hit the 8% plus range anytime soon. India’s GDP unexpectedly slumped to a three year low in the June quarter as manufacturers sought to get rid of stocks, rather than making more of them, ahead of the July 1 rollout of the goods and services tax (GST) amid the lingering impact of demonetisation.

“In nominal GDP terms we should be prepared for a much slower pace of growth because inflation has also fallen. This means that the real rates we saw a few years ago may not be expected,” said Rakesh Valecha, senior director at Ind-Ra.
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