Private sector capex to be muted till FY20

MUMBAI: The private sector capex is expected to grow only at a modest pace till FY20 due to weak domestic consumption demand, global overcapacity and negative impact of GST on working capital. According to India Ratings & Research, the corporate sector investment would grow at a compounded annual growth rate of just 5-8 per cent or Rs 1 lakh crore over FY18-FY20, which will largely be in the form of maintenance and essential upgrades by the 125 non-stressed of the top 200 asset-heavy corporates.

India Inc registered 4 per cent CAGR growth in capex over FY13-FY17, 13 per cent over FY09-FY12 and 49 per cent 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, it said. Meanwhile, Ind-Ra added that 75 stressed corporates with negative capex CAGR of 8 per cent during FY13-FY17 might face difficulties in undertaking even maintenance capex.

In the event of a rise in investment demand, along with low interest rates, the 125 non-stressed corporates will be the primary contributors to capex. Their contribution to the total capex in FY16-FY17 was 80 per cent with a capacity utilisation (CU) of 75 per cent to 80 per cent. However, stressed corporates could delay the overall investment recovery for another two-three years, given they have a low capacity utilisation of 40 per cent.

While the implementation of the Insolvency and Bankruptcy Code, 2016, is likely to streamline debt resolution through debt reduction options for stressed corporates, the low capacity utilisation of 40 per cent to 50 per cent of stressed corporates would lead to a pull-back of investments by the non-stressed corporates.

The consolidation of the unutilised capacity of stressed corporates could delay the overall investment recovery. It also added that the valuation mismatch between buyers and sellers, capital constraints, and fee-based income model of asset reconstruction companies would act as barriers to stressed asset resolution. At the current level of economic activity, Ind-Ra believes that stressed corporates would take another 10-11 years to deleverage their balance sheets to a sustainable level.