Indian Firms To Spend Rs 1 Trillion On Maintenance Capex

Corporates are likely to show an unwillingness to invest in long-term projects due to muted demand and significant leverage, despite a low interest rate environment, says Priyanka Poddar.

- Priyanka Poddar

Over FY18-FY20, growth in capex would be muted and overall corporate sector investment would grow by Rs 1 trillion (5-8 percent CAGR), primarily in the form of maintenance capex, according to India Ratings and Research’s (Ind-Ra) base case estimate based on moderate consumption demand, global overcapacity and working capital disruptions due to the goods and services tax. Corporates registered 4 percent CAGR growth over FY13-FY17, 13 percent over FY09-FY12 and 49 percent over FY05-FY08. Corporates are likely to show an unwillingness to invest in long-term projects due to muted demand and significant leverage, despite a low interest rate environment.

During the period, maintenance spending will be incurred by the 125 non-stressed corporates of the top 200 asset-heavy corporates. The capex of these corporates expanded at a 10 percent CAGR over FY12- FY17. Moreover, these corporates represented 80 percent of the total capex spending of the top 200 asset-heavy corporates over FY12- FY17, with a capacity utilisation of 75-80 percent. These 200 entities account for about 85 percent of the overall capex spending by India Inc.

However, the 75 stressed corporates, which registered negative 11 percent capex CAGR for FY12- FY17 and are from key investment-linked sectors, such as metals and mining, infrastructure, and power, may not even be in a position to incur maintenance capex. Thus, they are likely to drag down the investment recovery for another two-three years. The 75 stressed corporates represented 20 percent of the total capex spending over FY12-FY17, with a capacity utilisation of 40-50 percent.