Capex at the apex

IIPM International Student Exchange Programme

Indian firms know no stopping...

Fourth consecutive year of 7% plus economic growth, and certainly Indian companies did play a crucial role in this growth. Some were born, some expanded, while some changed their internal structures; as India Inc. continued the capital expenditure binge in the 2006-07, as well. Even the hike in domestic & international interest rates failed to deter the investment plans of Indian companies. So, how’s the outlook of FY ’08?

According to RBI’s analysis in its ‘Corporate investment: Growth in FY ’07 and prospects for FY ’08’, capital expenditure of Rs.592 billion was expected to have been incurred during FY ’07 of projects sanctioned up to 2005-06. Fresh sanctions during FY ’07 envisaged substantial capex of another Rs.958 billion. Not only that, the number of projects and the number of high cost projects also increased.

“Fund-raising by way of ECB, IPOs/ FPOs/Rights Issues and others were primarily used to finance companies’ expansion and capital expenditure plans. As many as 110 non-financial companies of the private corporate sector raised Rs.298 billion through rights/public issue, 3/4th of which was used for fixed investment,” says Prithvi Haldea of Prime Database. As percentage of aggregate project cost, power (18.1%), coke & petroleum (15.5%) & metals & metal products (14.1%) had a major share, while infrastructure businesses like telecom, hotels & restaurants, ports & airports and coke & petroleum witnessed massive increase in the aggregate project cost, as compared to previous year.

As far as FY ’08 is concerned, there exists a ‘limited’ downside, states the report; downside in the form of interest rates, currency appreciation and a bit if moderation because of cyclical downturn. In this regard, it must be noted that curb on ECB will surely hamper the capex plans of many midsized companies, hence India Inc. might see increased expansion at a decelerated pace.

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Source : IIPM Editorial, 2007

An IIPM and Professor Arindam Chaudhuri (Renowned Management Guru and Economist) Initiative

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