India Inc cautious on capex

BG Shirsat, Ashok Divase & Abhineet Kumar / Mumbai February 17, 2010, 0:28 IST


Says it will take another two quarters before capex gains momentum

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, 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.

EASING EXPANSION

Capital employed Capital employed as on % change
(Rs crore) Mar ’08 Mar ’09 Dec ’09 Mar ’09* Dec ’09#

Capital employed 11,42,104 14,12,056 14,59,649 23.64 3.37
Mining & Minerals 14,973 21,922 28,703 46.41 30.93
Sugar 21,769 25,547 29,408 17.36 15.12
Power 86,579 94,838 99,559 9.54 4.98
Base metals 77,360 86,139 87,348 11.35 1.40
Telecom 1,02,435 1,42,552 1,43,140 39.16 0.41
Steel 1,43,571 1,64,667 1,64,479 14.69 -0.11
Eng & capital goods 60,135 84,536 83,800 40.58 -0.87
Cement 17,183 20,748 18,802 20.75 -9.38

*% change over March 2008; #change over March 2009 (Source: BS Research Bureau)

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.

http://www.business-standard.com/india/news/india-inc-cautiouscapex/385948/

QIPs face roadblock as markets turn volatile

QIPs face roadblock as markets turn volatile

Rajesh Bhayani & Abhineet Kumar / Mumbai February 15, 2010, 0:55 IST


Enthusiasm for Qualified Institutional Placements (QIPs) to raise equity from institutional investors has slowed down.

This, market experts say, is because stock markets have turned volatile and funds flow from foreign institutional investors (FIIs) has turned negative. At least 15 companies are waiting for the market to improve to raise money through QIPs. But, unless prices turn positive and rise above two-week average, they will not be able to raise capital.

QIP is a capital raising tool preferred by listed companies in India to quickly raise funds with minimum documentation. Through QIPs, companies issue equity shares, fully and partly convertible debentures, or any securities other than warrants which are convertible to equity shares to qualified institutional buyers.

According to stock exchange announcements, 90 companies are waiting to raise about Rs 70,000 crore through this tool. “QIPs do not work in declining or volatile markets,” said Prithvi Haldea, chairman and managing director of Prime Database, Delhi-bases capital markets data provider.

“The primary capital market will be choppy in the short term. We have to price in volatility to ensure success of issuances. Investors are slowly becoming risk averse,” said S Ramesh, chief operating officer, Kotak Investment Banking.

A QIP’s pricing is based on the latest two-week average price of a stock. So, in a falling market, investors shy away from an issue when the prevailing market price comes below the two-week average.

Companies have raised about Rs 41,000 crore in the current financial year till January, when the Sensex rose 68 per cent to 16357 at the end of the month, from 9708 at the end of the last financial year.

“Appetite of investors has come down, which is affecting the QIP issues,” said Pankaj Jaju, executive director, investment banking at Enam Securities.

The fund flow from FIIs turned negative in January, for the first time in the current financial year. There was net outflow of Rs 1,100 crore FII money in the month, against inflow of average Rs 10,100 crore in the last nine months. FIIs have been the largest subscribers to the QIP issues.

FII sentiment has also been hit since the US President spoke about plans to ban proprietary trading of US banks last month. Proprietary trading has been the mainstay of these banks and such a move could hurt their investing capabilities. There is also rising concern of governments globally withdrawing stimulus packages over a period of time. This has affected the stock markets in India, along with other markets worldwide.