Private capex cycle on the cusp of revival  

The animal spirits of India Inc have been dormant for a while now despite repeated calls awaken it. That could change soon, going by the way India Inc is diligently sprucing up its books, getting ready to face higher demand conditions in the future.

Nascent signals of increasing capital investments are captured in the pick-up in credit growth of banks, which hit 9.6 per cent this March. Of greater interest are the signs of revival seen in credit growth to industry, which grew 6.5 per cent in February 2022 compared to the same month last year. While the micro and small industries registered growth of 19.7 per cent, credit offtake by medium-sized companies was much higher, at 74.7 per cent. The credit growth in larger companies was, however, tepid at 0.5 per cent.

While policy support to smaller companies through the Emergency Credit Line Guarantee Scheme seems to have improved their credit demand, larger companies seem to be more watchful. They are probably waiting for greater certainty on geopolitical tensions as well as on the progress of the pandemic. With private consumption too in a nebulous state, they cannot be faulted for this hesitant approach.

Private sector companies have however used the lull in activity during the pandemic to spruce up their balance sheets and are battle-ready to spend on capital expenditure once demand revives. But until this cycle revives, the Centre and the States cannot afford to slacken the momentum in capital spends.

Credit quality of India Inc improves 

Credit rating companies struck an optimistic note while reviewing the performance of the companies under their radar, indicating a marked improvement in credit quality in the second half of FY22. The rating upgrades to downgrades ratio of companies covered by CRISIL increased to 5.04 in the second half of FY22 from 2.96 times in the first half of the fiscal year.

The rating agency pointed towards strong growth in revenue, tight leash on costs and continued deleveraging as the reasons for improvement in balance sheets of the companies. CRISIL points out that average gearing of companies declined to 0.55 times from close to 1, before the pandemic began. This has impacted the bottomlines of companies positively with interest cover improving to 4.14 times in FY22 from around 3.5 times in FY20.

Rating downgrades of ICRA was also limited to just 184 entities accounting for 6 per cent of its universe. This is far lower than 13 per cent in FY20 and the average of the last 10-years of 9 per cent. Similarly, rating upgrades at 19 per cent amounting to 561 entities, were far better than the long-term average of 11 per cent.

Sectoral trends in deleveraging 

An analysis of the industry-wise classification of bank credit shows that some sectors could be witnessing higher demand of late, making them take on higher debt. For instance, credit to engineering companies shrunk by 3.15 per cent in FY21 but it has expanded 5.2 per cent between April 2021 and January 2022.

Credit to petroleum, coal and nuclear fuel too turned positive at 10.33 per cent in FY22 compared with credit contraction of 9.86 per cent in FY21. Credit growth for drugs and pharmaceutical companies was 5.42 per cent in FY22, compared to flat growth in FY21.

Some of the other sectors showed continued growth in credit offtake in both FY21 and FY22 as government policies provided impetus. Food processing, textiles, electronics and road infrastructure companies continued to demand credit from banks in both the pandemic-hit years as they were buttressed by the government spends and policy incentives.

The third bucket of sectors which witnessed heavy deleveraging in both FY21 as well as FY22, were those that were saddled with heavy debt prior to the pandemic. As cashflows improved due to cost-cutting, lower input and interest costs, these companies have been pruning their debts significantly. This group of companies are also those that need to spend heavily on capex such as iron and steel, cement and fertilisers.

Our analysis of the changes in the balance sheets of manufacturing companies forming part of Nifty 500 index shows that some of the behemoths of India Inc such as Reliance Industries, Tata Steel, SAIL, IOCL, Larsen and Toubro, Jindal Steel, Ultratech Cement and Chambal Fertilisers have slashed their debt between 10 per cent and 76 per cent since FY20. Many of these larger companies have also been hiving off unwanted assets in order to improve cash balances.

Revival around the corner? 

Besides turnaround in credit demand from some sectors, there are other indications that capex cycle could revive. Capacity utilisation in manufacturing improved to 72.4 per cent in December 2021 quarter, the highest since 2019. Higher utilisation points towards improved output which can make companies think about capacity expansion, if the trend sustains.

Continued buoyancy in PMI indices too points towards optimism among purchasing managers about future demand. Value of new project announcements have also been increasing steadily in recent months, crossing ₹50,000 crore in March 2022, led by electricity and metals sector.

That said, the raging inflation and impact of the Russia-Ukraine war on global growth and trade are likely to keep the larger companies on the fence for a few more quarters. With input cost pressures increasing and interest rates also beginning to increase, they will be focused on protecting their margins rather than spending on capex.

The Centre therefore needs to keep the momentum going in public capital expenditure. Some slow-down in government capex was evident in FY22 with growth in capex spending declining to 15.7 per cent in February 2022, from close to 60 per cent in October 2021. National Highways constructed between April 2021 and February 2022 at 8,045 km was much lower than 11,143 km in the corresponding period the previous fiscal year.

Such slowdowns need to be avoided if the virtuous cycle of private capex must be kick-started. Besides, the Centre can consider some additional fiscal sops to nudge larger companies to spend on capex.