India Ratings and Research (Ind-Ra), a part of Fitch group, has said that the capex cycle of the top 500 asset owning corporates (excluding banks and financial services) may be close to bottoming out. The rating agency, however, maintained that further downside to capex spending is limited, but an immediate meaningful revival of private capex spending is unlikely.
The rating firm said that factors such as subdued commodity prices and capacity utilisation levels close to decade lows provide limited motivation to private corporates to take up capex. The high leverage of a large number of corporates may limit their ability to take up even normal maintenance capex.
Ind-Ra estimates that the capex spending in FY15 may have nosedived to Rs 2.76 trillion-Rs 2.8 trillion (FY14: Rs 2.94 trn; FY13: Rs 2.85 trn), the lowest in the last five years. FY16 capex spend may range between Rs 2.8 trillion-Rs 3.0 trillion.
Past capex spending trends suggest that heavy capex spending usually starts when capacity utilisation closes in towards the 90 per cent level. Ind-Ra estimates that while the capacity utilisation of these 500 corporates may have shown a marginal uptick in FY15, still the utilisation level continues to hover around a decade low.
Three sectors namely oil & gas, metals & mining and power typically constituted 50 per cent-60 per cent of the total annual capex spending of the top 500 corporates and exhibited annual capex spending growth of 15 per cent - 30 per cent.
The current capex cycle may be revived by significant government spending. Past observations suggest that gross fixed capital formation (GFCF) revives first, driven mostly by government spending, following which private corporate spending picks up.
With respect to under implementation projects, the government has been faring better than private corporates particularly post FY13. As such, this trend is likely to continue over the next 24 to 36 months.
The government's proposed initiatives on infrastructure related spending attributable to Indian Railways, Coal India Limited and public sector units in the power sector and renewable energy, if executed in the requisite scale and a timely fashion, may trigger a capex revival in private corporates in 2HFY17.