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India Inc firming up capex plans after a year-long lull

ET Intelligence Group: India Inc is slowly overcoming its inertia despite turbulent politics, choppy markets and hardening oil prices. For a consumer economy plagued by supply overhang, promises of capital expenditure by several private sector companies after a year-long lull have stoked hopes of a rebound. Tata Steel, Ambuja Cements, Eicher Motors, Hero MotoCorp, Asian Paints, CEAT, Apollo Tyres and Jubilant FoodWorks are among the companies that have announced investments totalling Rs 50,000 crore in the past four months.

Jubilant FoodWorks, which paused store expansion in the previous fiscal, plans to open 75 new stores in FY19 following a six-year-high growth of 26.6% in the March 2018 quarter. High capacity utilisation and better demand visibility are major triggers for companies to commit — and in some cases even go ahead with — fresh capital investments. The growth in private capex in India slowed down to less than 7% annually between FY11 and FY17 for the BSE 200 companies (excluding banking and finance firms and IT). But this figure comes down to 2% if investments by Reliance Industries, which was largely driving the capex growth, are excluded.

Capex growth had risen at a rapid pace of 35% between FY03 and FY11. The gross capital formation of Indian companies, which reflects investments in assets, dropped to a decade-low 27% in the September 2017 quarter, according to the ministry of statistics and programme implementation.

Capex of BSE 100 companies

Fund-Raise to Help Capex Cycle
But industry trackers believe that the cycle is turning for the good and chances of a more evenly distributed capex growth are stronger.

“Uptick in housing cycle, revival in select industries and continued government support are the key positives. Also, companies are expected to raise $60 billion (around Rs 4 trillion) in the primary equity market in the next two years. This should help capex cycle,” said Amit Tiwari, Partner, Pineoak Capital, a wealth manager.

Morgan Stanley in a note a few months ago said, “We expect a positive inflexion point in the macrocycle in 2018. This will likely be marked by a synchronous recovery in domestic and external demand and, more importantly, a pick-up in private capex for the first time in six years.” And, in the customary chat with analysts, more and more companies are talking about capex plans — a conversation they refrained from in the past one year.

Typically, capacity utilisation of over 80% prompts companies to expand capacities. According to RBI data, capacity utilisation in the manufacturing sector rose to 74.1% in the December 2018 quarter from 71.2% in the June quarter. The capacity utilisation of several companies in the consumer discretionary sector has crossed 80% and some facilities are operating at the full capacity.

For Hero MotoCorp, utilisation reached 82% in FY18 on the current installed base of 9.2 million units. In the earnings concall after the March quarter results, the company announced it would spend Rs 2,500 crore to increase the capacity to 10 million by 2020. “The main objective of capacity expansion is to fulfil demand without facing capacity constraints,” said a company official of Hero MotoCorp.

Eicher Motors, the manufacturer of marque motorcycle Royal Enfield plans to increase the installed capacity to 1.2 million by FY21 from the current capacity of 0.95 million by investing Rs 800 crore. Analysts expect Royal Enfield to record 14% growth annually between FY18 and FY21, which will require the company to expand capacity.

In line with automakers, autoancillaries too are increasing capacities.

Subbiah Kumar, CFO at CEAT said, “We are increasing capacity since we expect demand to remain strong. We also anticipate increase in the wallet share from OEMs (original equipment manufacturers)”.

The capacity utilisation of CEAT is more than 80% and its truck and bus redial facility is at full utilisation. CEAT is investing Rs 4,000 crore in the next 2-3 years to increase its capacity to 1600 tons per day from around 1000 tons per day.

Its peer, Apollo Tyres is putting up a new greenfield facility inAndhra Pradesh by investing around Rs 1,800 crore.

Satish Sharma, president for Asia Pacific, Middle East & Africa at Apollo Tyres, said: “With the automotive sector being the shining star of the GDP growth, there is an increased demand for tyres. Amid the increased demand for tyres, our products, across categories, is getting a good traction. While the de-bottlenecking and brownfield capacity expansion will help us meet the demand now, the Andhra Pradesh greenfield, once ready, will cater to the increased demand for the next five years.”

The buoyancy in the disposable income is prompting multiplex operators to expand capacities.

PVR, Indias largest multiplex operator, plans to open 90 screens in the current fiscal with an investment of Rs 450 crore.

Nitin Sood, CFO of PVR, said the company is stepping up the pace of screen additions and upgrade of existing screen portfolio.

The other large multiplex operator, Inox plans to open 55 screens in FY19 by spending Rs 250 crore.

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