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Indian Inc cashrich, but has few capex plans
By agencies
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Wednesday, 11 May 2005, 19:30 IST
MUMBAI: With cash balances on corporate balance sheets at all-time high, things could not have been better. Yet, India Inc is going slow on capital expenditure if the latest trend is anything to go by.
The Center of Monitoring Indian Economy (CMIE) data shows that the cumulative project investments outstanding are at an all-time high of 
189. 5 billion. The data includes projects announced bycompanies and government institutions over the years, business daily The Economic Times reports.
This is nearly 60 percent of the countrys gross domestic product (GDP).
Several Indian and foreign companies have made big announcements recently. South Koreas Posco is negotiating an $8 billion investment in an Orissa plant. Hindalco the AV Birla Group flagship plans to invest 780 billion in a 1 million ton aluminum facility. Jindal Steel is planning to invest 110 billion, while Essar Steel is looking at investing Rs 500 billion in a steel plant.
Several other companies in the automobile, consumer goods and cement sectors are planning to expand existing capacities or make acquisitions.
Besides this, the planned projects include giant infrastructure projects worth well over 3 trillion for the development of Mumbai. The Golden Quadrilateral connecting the four metros is included in the overall figure, the report said.
However, analysts estimate that projects actually under implementation are only about 26 percent of the GDP. This brings the figure down to approximately Rs 850 billion. In reality, experts say that only a quarter of the headline amount collated by CMIE is likely to actually see implementations in the near future, the report added.
The capital expansion or capex as a percentage of GDP is at a 31-year low in India, according to brokerage JM Morgan Stanley. In the past 10 quarters to January 31, 05, 574 billion worth of projects were added, while projects worth Rs 1. 47 trillion witnessed completion. This is less than 25 percent of the announcements made
For the quarter ended January 31, 05, Rs 81 billion worth of projects were added. Project investments worth Rs 156 billion were completed during the period.
Corporate balance sheets look better than ever before. India Incs debt-to-equity ratio is the lowest in 10 years at 0.5. Falling interest rates over the past few years allowed companies to restructure their balance sheets.
Brokerage JM Morgan Stanley estimates that the cash and cash equivalent is at 23 percent of the total assets for India Inc. The cost of capital is also less than 6 percent, compared to 7.5 percent in the mid 90s. For many companies, the fear of over-capacity is the reason for exercising caution. For example, in the cement sector, most of the industry is operating at over 90 percent capacity.
In the past, when companies expanded capacity, they met with a cyclical downturn, which hurt their businesses. This is at the back of their minds, according to industry sources.
Similarly, in the automobile sector, many companies are believed to be looking at plants that can give them a global scale. There has been a significant increase in the capacity already, with an average 20 percent growth. Many of these companies want to set up a plant with 1,00,000 units. However, analysts say they are not sure whether they will be able to sell 1,00,000 more units.
In the power sector, the kickstart could come with the solution to the Dabhol Power Company (DPC) dispute. Many announcements have been made. However, experts say that very few projects have witnessed actual implementation.
The Street believes that the capex recovery may be muted in 05-06. A section of the players argue that capex plans are not as irrational as they used to be in the mid 90s.
Corporates are cautious on expanding rapidly and utilizing the excess cash on their books. This is because infrastructure bottlenecks are a key hurdle. Besides this, there is a sharp decline in import tariffs. This is seen as a threat to achieving a higher return on equity. The rising rupee is also a relatively new situation for companies to tackle, compared to the devaluation and fall in the rupee in the 90s, the report said.
189. 5 billion. The data includes projects announced bycompanies and government institutions over the years, business daily The Economic Times reports.
This is nearly 60 percent of the countrys gross domestic product (GDP).
Several Indian and foreign companies have made big announcements recently. South Koreas Posco is negotiating an $8 billion investment in an Orissa plant. Hindalco the AV Birla Group flagship plans to invest 780 billion in a 1 million ton aluminum facility. Jindal Steel is planning to invest 110 billion, while Essar Steel is looking at investing Rs 500 billion in a steel plant.
Several other companies in the automobile, consumer goods and cement sectors are planning to expand existing capacities or make acquisitions.
Besides this, the planned projects include giant infrastructure projects worth well over 3 trillion for the development of Mumbai. The Golden Quadrilateral connecting the four metros is included in the overall figure, the report said.
However, analysts estimate that projects actually under implementation are only about 26 percent of the GDP. This brings the figure down to approximately Rs 850 billion. In reality, experts say that only a quarter of the headline amount collated by CMIE is likely to actually see implementations in the near future, the report added.
The capital expansion or capex as a percentage of GDP is at a 31-year low in India, according to brokerage JM Morgan Stanley. In the past 10 quarters to January 31, 05, 574 billion worth of projects were added, while projects worth Rs 1. 47 trillion witnessed completion. This is less than 25 percent of the announcements made
For the quarter ended January 31, 05, Rs 81 billion worth of projects were added. Project investments worth Rs 156 billion were completed during the period.
Corporate balance sheets look better than ever before. India Incs debt-to-equity ratio is the lowest in 10 years at 0.5. Falling interest rates over the past few years allowed companies to restructure their balance sheets.
Brokerage JM Morgan Stanley estimates that the cash and cash equivalent is at 23 percent of the total assets for India Inc. The cost of capital is also less than 6 percent, compared to 7.5 percent in the mid 90s. For many companies, the fear of over-capacity is the reason for exercising caution. For example, in the cement sector, most of the industry is operating at over 90 percent capacity.
In the past, when companies expanded capacity, they met with a cyclical downturn, which hurt their businesses. This is at the back of their minds, according to industry sources.
Similarly, in the automobile sector, many companies are believed to be looking at plants that can give them a global scale. There has been a significant increase in the capacity already, with an average 20 percent growth. Many of these companies want to set up a plant with 1,00,000 units. However, analysts say they are not sure whether they will be able to sell 1,00,000 more units.
In the power sector, the kickstart could come with the solution to the Dabhol Power Company (DPC) dispute. Many announcements have been made. However, experts say that very few projects have witnessed actual implementation.
The Street believes that the capex recovery may be muted in 05-06. A section of the players argue that capex plans are not as irrational as they used to be in the mid 90s.
Corporates are cautious on expanding rapidly and utilizing the excess cash on their books. This is because infrastructure bottlenecks are a key hurdle. Besides this, there is a sharp decline in import tariffs. This is seen as a threat to achieving a higher return on equity. The rising rupee is also a relatively new situation for companies to tackle, compared to the devaluation and fall in the rupee in the 90s, the report said.