Private capital expenditure (capex) will grow by Rs 1 lakh crore till FY20, ratings agency India Ratings and Research (Ind-Ra) has said in a report.
This increase will be largely in the form of maintenance and essential
upgrades by non-stressed companies. Capex recovery will revive after
FY20. This estimate is based on moderate consumption demand, global
overcapacity, and working capital disruptions owing to the goods and
services tax (GST), and considers a compound annual growth rate (CAGR)
of five-eight per cent.
The report states that companies are likely to show unwillingness to
invest in long-term projects due to muted demand and significant
leverage despite a low-interest rate environment.
Of the top 200 asset-heavy companies, 125 non-stressed ones, having
strong financial profiles and low leverage levels, will incur
maintenance spending for the next two years and also drive growth capex
beyond FY20. However, the 75 stressed ones may not be in a position to
incur maintenance capex even, dragging down investment recovery for
another two-three years.
While the Insolvency and Bankruptcy Code, 2016, would accelerate the
debt resolution of stressed firms, low capacity utilisation would lead
to a pull-back of investment by non-stressed companies.
The risk-averse behaviour of the banking sector, especially public
sector banks, and their bad asset problems would increase their
reluctance to lend to fresh projects of stressed companies.
Liquidation under the code could lead to supply constraints, giving
opportunities to non-stressed companies to expand capacity.
Growing competition and increasing mergers and acquisitions will result
in consolidation among stressed companies, pushing back large-scale,
debt-funded capex by non-stressed companies.
Ind-Ra says
both capital markets and non-banking financial corporations have a
limited appetite in terms of size and risk to absorb long-tenure funding
requirements.
Government capex increased in absolute terms over FY16 and FY17 but has been decelerating as a proportion of nominal
GDP.
Despite the expected fiscal stimulus and higher government spending due
to incremental revenues on account of the GST, the overall investment
cycle is unlikely to revive.