Only handful of large firms ready for big spending

Bankers said that the private capex cycle is quite uneven as large spending is mainly restricted to government projects, with only a few large conglomerates planning to spend on big projects. Among the conglomerates investing in new projects or capacity expansion are the Adani and Tata groups.

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“We are yet to see sizeable interest from companies beyond the usual names to say that the capex cycle has restarted in full swing. Companies are spending, but it is not across the spectrum,” one of the bankers cited above said on condition of anonymity.

Experts and bankers said many companies are reluctant to commit to large projects amid surging inflation and high interest rates despite plant capacity utilization improving to over 75%, a level where most firms expand factories to create room for future growth.

“Having deleveraged over the past couple of years, some companies are reluctant to take on fresh debt as the interest rate cycle has turned. They are aware that there will be further hikes, and it could affect margins and bottom line,” the banker said.

After two years of keeping interest rates at record-low levels to boost growth during the pandemic, the Reserve Bank of India hiked the repo rate by 190 basis points (bps) since May. This led to higher borrowing costs for retail as well as corporate borrowers.

In fact, several corporate borrowers whose loans were linked to an external benchmark like the repo rate have requested banks to peg it to the marginal cost of funds-based lending rate (MCLR), an internal benchmark with slower transmission. The one-year MCLR increased by 50 bps since May.

In the budget, Sitharaman allocated ₹7.5 trillion for government capex spending, hoping the record spending—35% more than the previous fiscal —will encourage the private sector to boost expenditure as well. But the tepid response from the private sector prompted her to ask top businessmen why companies weren’t stepping up spending despite tax cuts and other fiscal incentives. The lukewarm response has forced the government to do the heavy lifting to boost economic growth.

Banks said public sector companies have also pushed the throttle on investments. Central public sector enterprises spent ₹1.37 trillion in Q1 of FY23, about 21% of their annual target of ₹6.61 trillion, showed data from CareEdge. In FY22, these entities achieved only 79% of annual capex target of ₹5.95 trillion till February 2022.

Mint also reported how Adani was in talks for a ₹14,000 crore loan for a coal-to-polyvinyl chloride plant in Gujarat and how Jindal Steel and Power Ltd was to raise ₹15,000 crore for expansion of its Angul plant in Odisha.

The second banker said lenders are receiving loan requests for new projects in the mid and small corporate categories. However, these projects of ₹50-500 crore would not be able to move the needle the way larger capex projects would.

“Just today, we had an internal meeting to look at some new mid- and small-project proposals. There is substantial interest from sectors like textile, solar energy and ethanol blending,” the second banker said, also on condition of anonymity.

Experts said while private investment has remained lacklustre, the pace may pick up in the coming months. “With capacity utilization rising above 75%, coupled with an improving demand scenario, we could expect the private investment cycle to accelerate,” a CareEdge report said on 15 September, adding that although the Centre’s continued thrust on capital spending is a welcome move, increased private participation is warranted to unleash the animal spirits in the economy.