Industrial growth in December may have been the highest in the past 29 years, but India Inc is still cautious on its capital expenditure (capex) plan. Most say it will take another two quarters before capex gains momentum.
A study of 435 companies listed on the Bombay Stock Exchange, which provide their capital-employed data on a quarterly basis, shows capex grew by a meagre 3.4 per cent in the nine months ending December 2009, compared to the level in March 2009.
The capex of these companies in 2008-09 grew by Rs 269,952 crore (Rs 2,699.52 billion), up 23.67 per cent over the figure at the end of the previous year.
"There has been a lack of confidence in the system, slowing the demand for fresh capital expenditure by companies," said R Shankar Raman, executive vice-president, finance, at Larsen & Toubro.
He said there had been some pick-up in the orders given to capital goods companies in January, but attributed it to the last-quarter phenomenon, when companies try to use their annual budgetary allocation.
"I will wait for more certainty," he said, explaining that companies would wait for five to six months more before planning fresh capital spending.
"Banks are sanctioning loans but disbursements are not taking place, as companies fear demand growth could be short-lived," said P Harshavardhan, partner & director at the management consultancy firm, The Boston Consulting Group.
Some are more optimistic. Mahesh Vyas, managing director and chief executive officer at the Centre For Monitoring Indian Economy, admitted the capital expenditure of companies had slowed in the June quarter, but emphasised that it had slowly started strengthening since.
"Orders given to capital goods companies in January shows continuation of capital expenditure by the companies," he said.
The cement industry showed the poorest growth, with a decline of 9.3 per cent in the capital employed, indicating they had completed most of their expansion projects and reversed unallocated funds.
Similarly, there were reversals of funds from the capital goods and steel makers in that period, showing a decline of 0.87 and 0.11 per cent, respectively, in their capex.
The highest rise in capex in the nine months came from the mining and minerals industries, of 30.9 per cent. Sugar, power and base metal industries also respectively grew by 15.1, 4.98 and 1.4 per cent in this period.
Telecom, the driving factor of capex for over a decade, grew by a meagre 0.4 per cent in the period, as Reliance Communications and Idea Cellular had completed their expansion plans.
"Companies in these nine months focused on rationalisation of capacity instead of capacity expansion," said Ashvin Parekh, national leader-global financial services, at Ernst and Young, the accounting and management consultancy.
"Fears of rising interest rates would prompt companies to tie-up for working capital requirements in the first quarter of the next financial (year), but the new capital expenditure is expected to pick by only by the second quarter," he said.
