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  Business   In Other News  16 Feb 2019  Capex takes a beating in Q3

Capex takes a beating in Q3

THE ASIAN AGE. | ASHWIN J PUNNEN
Published : Feb 16, 2019, 1:54 am IST
Updated : Feb 16, 2019, 1:54 am IST

As such private capital expenditure (capex) has hit a decade low on poor demand growth and lower capacity utilisation.

Experts have a low level of conviction about private capex recovery.  (Representational image)
 Experts have a low level of conviction about private capex recovery. (Representational image)

Mumbai: With uncertainty over the general elections looming, domestic companies are holding back their investment in capacity additions. As such private capital expenditure (capex) has hit a decade low on poor demand growth and lower capacity utilisation.

Many analysts feel that companies, which create capacity in advance on demand expectations, are on a wait-and-watch mode till the general elections get over and capacity utilisation trends up.

“We are not seeing or expecting any revival in corporate capex till the election results are out. Any visibility on fresh capex will come only after the Lok Sabha elections,” says Rusmik Oza, Head-Fundamental Research, Kotak Securities.

Experts have a low level of conviction about private capex recovery. The capex as a percentage of GDP has now come down to 27 per cent from a peak of 33 per cent in 2013, as companies faced a sharp drop in utilisation of existing capacities.

A combination of factors, such as low corporate return expectations, stressed balance sheets, along with a tight credit environment and macro economic outlook are leading to this dismal situation, analysts said.

Industry has excess capacity at the moment and it would rather see capacity utilisation pick up first, before thinking of creating new capacity, analysts said.

According to the Reserve Bank of India, capacity utilisation in the manufacturing sector was less than 72 per cent in Q2FY18. The utilisation level was over 80 per cent in FY10, the last time private capex saw a surge.

Plant load factor of thermal plants, which used to be about 78 per cent in FY10, was less than 60 per cent in Q3FY18. The expected increase in interest rate and the sustained increase in bond yields suggest that easy money will not be an investment driver in FY19. Domestic demand has not been very robust over the years, with near-drought-like conditions in 2014 and 2015, followed by disruptions of demonetisation (2016) and GST (2017). This sustained battering has reduced the scope for aggressive demand growth. This led to low capacity utilisation levels, which will adversely impact corporate decisions to expand capacity this year.

On the positive side, investment has started in a few sectors, like construction, from the launch of various building schemes in the recent past, mainly driven by the government spending in industrial parks, smart cities, logistics network, housing for all scheme and the like.

“Investment in the consumer goods sector is also seen during the quarter due to rising disposable incomes and potential penetration in the rural markets. But in overall, this trend is muted due to NPA and slowdown in business,” says Vinod Nair, Head-Research at Geojit Financial Services.

Tags: capex, kotak securities