India Inc slow on capital expenditure: CMIE

MUMBAI: With cash balances on corporate balance sheets at an all time high, things couldn't have got any better. Yet, India Inc is going slow on capital expenditure if the latest trend is anything to go by. The Centre of Monitoring Indian Economy(CMIE) data shows the cumulative project investment outstandings are at an all-time high of Rs 18,95,211 crore. The data includes projects announced by companies and government institutions over the years. This is nearly 60% of the country's gross domestic product. Several Indian and foreign companies have made big announcements. South Korea's Posco is negotiating a $8 billion investment in an Orissa plant while Hindalco, the AV Birla Group flagship company, plans to invest Rs 7,800 crore in a 1 million tonne aluminium facility. Jindal Steel is planning to invest Rs 11,000 crore while Essar Steel is planning to invest Rs 5,000 crore in a steel plant. Several other companies in the automobile, consumer goods and cement sector are planning to expand existing capacities or make acquisitions. Besides these, the planned projects also include giant infrastructure projects worth well over Rs 30,000 crore announced for the development of Mumbai. The golden quadrilateral connecting the four metros is also included in the overall figure. However, analysts estimate that projects actually under implementation are only about 26% of the gross domestic product. This brings the figure down to approximately Rs 8,50,000 crore. Experts say that only a quarter of the headline amount collated by the CMIE is likely to actually see implementations in the near future. The capital expansion or capex as a percentage of GDP is at a 31-year low in India according to brokerage J M Morgan Stanley. In the past 10 quarters to January 31, 2005, Rs 5,74,833 crore worth of projects were added. Projects worth Rs 1,47,051 crore witnessed completion. This is less than 25% of the announcements made. For the quarter ended January 31, 2005, Rs 81,177 crore worth of projects were added. Project investments completed were worth Rs 15,609 crore during the period. Corporate balance sheets look better than ever . The debt-to-equity ratio is the lowest in 10-years at 0.5 for India Inc. Falling interest rates over the past few years allowed companies to restructure their balance sheets. Brokerage J M Morgan Stanley estimates the cash and cash equivalent is at 23% of the total assets for India Inc. The cost of capital is also less than 6%, compared to 7.5% in the mid-nineties. According to N Sethuram, chief investment officer, SBI Mutual Fund, companies are increasingly looking for brownfield expansion. Looking for an existing capacity is taking more time, Mr Sethuram said. For many companies, the fear of over-capacity is the reason for caution. For example, in the cement sector, most of the industry is operating at over 90% capacity. In the past, when companies expanded capacity, they met with a cyclical downturn which hurt their businesses. This is at the back of their minds, according to industry sources. Similarly, in the automobile sector, many companies are believed to be looking at plants that can give them a global scale. There is significant increase in the capacity already with an average 20% growth, according to Mr Sethuram. Many of these companies want to set up a plant with 100,000 units. However, analysts say they are not sure whether they will be able to sell 100,000 more units. In the power sector, the kickstart could come with the solution to the Dabhol Power Company dispute. There are many announcements. However, experts say that very few projects have witnessed actual implementation. The Street believes that the capex recovery may be muted in '05-06. Corporates are cautious on expanding rapidly and utilising the excess cash on their books. This is because infrastructure bottlenecks are a key hurdle. Besides this, there is a sharp decline in import tariffs. This is seen as a threat to achieving a higher return on equity. A rising value of rupee is also a relatively new situation for companies to tackle in comparison to the devaluation and fall in the value of the rupee in the nineties.

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India Inc slow on capital expenditure: CMIE

With cash balances on corporate balance sheets at an all time high, things couldn't have got any better. Yet, India Inc is going slow on capital expenditure if the latest trend is anything to go by.

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