A company incurs capital expenditure (CapEx) to acquire or upgrade physical assets, including property, plant, and equipment. In this periodic report, ARC Advisory Group looks at a number of different manufacturing industries to identify the current CapEx trends in India. We calculate CapEx in two separate segments: based on the money spent on acquiring and upgrading total fixed assets, and on the money spent on acquiring and upgrading the plant and machinery.
While ARC also publishes a separate global Capital Expenditures report for leading industries in all world regions, this report focuses exclusively on India’s capital expenditure analysis and includes the CapEx trends for leading industries in the country. These include automotive, cement, chemical & petrochemical, electric power, metals, oil & gas and refining, food & beverage, and pharmaceutical.
Industrial companies are seizing the present growth opportunity that India offers. Companies are building best-in-class industrial facilities to meet the growing needs of the country’s expanding consumer class. Major investments have been planned for infrastructure development. These should help push the domestic steel companies to increase production. The plan to expand and upgrade refineries to meet India’s Bharat Stage (BS) emissions standards for vehicle fuels is also underway. While some sectors, like power generation and cement, are currently burdened with overcapacity and underutilization of assets, in the long run, the rise in domestic demand will increase the value creation through these assets. On the infrastructure front, government has allocated huge investments for building roads, railways, airports, and ports; and companies are likely to rev up their capacity expansion activities to meet domestic demand in the coming years. According to ARC Advisory Group’s India CapEx Survey, capital spending as a percentage of revenue is greatest in the country’s electric power, oil & gas, and chemical industries.
The overall CapEx in India has been declining since 2016. The structural reforms in the form of demonetization (in late 2016) and Goods and Services Tax (GST) implementation (in mid-2017) led to a temporary and short-term dip in industrial activities. India has nearly overcome this disruption and is expected to sustain the growth momentum going forward.
In 2018, India’s gross domestic product was approximately $2.78 trillion, with a per-capita GDP of more than $2,037. The economy grew at 6.8 percent in 2018-2019. In terms of purchasing power parity, India’s GDP, at around $9.33 trillion, was the third largest in the world in FY 2018-2019. The country continues to be among the fastest-growing economies in the world despite a slight moderation in GDP annual growth rate of 6.8 percent in FY 2018-2019 as compared with 7.2 percent in FY 2017-2018.
India’s economic growth is expected to pick up speed in 2019 with eased monetary policy and a corporate tax cut of 22 percent (from 30 percent). These should work to boost corporate investment in the coming years. The country’s GDP is driven mainly by the service sector, which constitutes over 54 percent. Agriculture is the main occupation in India, accounting for over 14 percent of GDP. The industrial sector (manufacturing, mining, and utilities) accounts for over 31 percent of GDP. According to the Department of Industrial Policy & Promotion, India received foreign direct investment (FDI) inflows worth $64.4 billion during the FY 2018-2019.
The Purchasing Manager’s Index (PMI) for the manufacturing sector, started at an expansion mode in January and decelerated in March, which indicated weak manufacturing conditions. The PMI gradually increased in June and the last quarter of the year, indicating growth in the country’s manufacturing sector due to rise in domestic demand.
India undertook demonetization of high-value currency notes in November 2016, resulting in a sharp dip in the manufacturing and construction sectors. The effect on some industries was more pronounced than the others due to lack of liquid cash.
The labor-intensive construction industry, along with the cement industry and medium- and small-sized secondary steel sectors also witnessed slow growth. However, the effects of demonetization were temporary and started to wane by the end of mid-2017. But at that point, the GST was introduced, affecting supply chains, especially those in which small traders were suppliers of intermediates to larger manufacturing companies. The liquidity crunch, weak global business sentiments, and trade war impacted the economic growth. However, the Indian economy is expected to grow at 6.1 percent in 2019 and picking up to 7 percent in 2020.
Delivering CapEx Scenario - Methodology and Factors for Consideration
ARC Advisory Group’s India Capital Expenditure Survey 2018 tracks total capital expenditure, capital expenditure on plant and machinery, total revenue, total assets, and asset turnover. The sample size includes 90 companies from eight major industries representing about $530 billion revenues in 2018. This capital expenditure survey is based on the analysis of the information from the annual report of India’s leading companies in the following important and growing industries: automotive, cement, chemical & petrochemical, electric power, metals, oil & gas and refining, pharmaceutical, and food & beverage.
Major Factors Influencing India's Economy and CapEx
Rise in Oil & Gas Prices
India’s dependence on energy imports increased to around 84 percent in FY 2018-2019. Rebounding oil prices spiked up oil imports, widening the current account deficit. The country’s oil import bill rose by $32.3 billion. Higher crude oil prices, subdued global trade activity, and geopolitical uncertainties took a toll on India’s external sector as the current account deficit widened to its highest level since FY 2012-2013.
In the past several years, it became evident that energy prices will have a large impact on manufacturing in all industries. The energy required to generate heat, cooling, steam, compressed air, electricity, and such others is becoming an increasingly important cost factor that must be measured, monitored, and controlled, just as any other cost component. Increasing raw material and energy prices are a source of concern for both manufacturers and automation suppliers since they impact production cost directly.
Consumption has been the major contributor to India’s growth story, however this contribution has moderated quite a bit in recent times. The share of consumption of the GDP has fallen from 71.5 percent during 2012- 2014 to 69.8 percent during 2015-2019. Private consumption remains one of the key drivers for India’s economy. Private final consumption expenditure decreased significantly from 66.2 percent of the GDP during 2012-2014 to 57.5 percent in 2015-2019. This was due to a slowdown in demand for the automotive, fast-moving goods, and real estate sales sectors. The consumption levels have been declining in both rural and urban areas. Rural incomes have been falling due to low agricultural product prices, leading farmers to buy fewer tractors and two-wheelers.
The economy witnessed a gradual transition from a period of high and variable inflation to more stable, low-level inflation over the last five years. The Consumer Price Index (CPI) has also been declining: 3.4 percent in FY 2018-2019 from 3.6 percent in FY 2017-2018, 4.5 percent in FY 2016-2017, 4.9 percent in FY 2015-2016, and 5.9 percent in FY 2014-2015. Both urban and rural inflation areas have been marked by low inflation. Food inflation has seen a sharp decline, with the consumer food price index falling to 0.1 percent in FY 2018-2019. This clearly reflects falling farm income and wages and has serious implications for the economy, as close to 50 percent of the total workforce depends on the agriculture sector.
Stable inflation makes a country more attractive for foreign investors. Low inflation raises concerns over GDP growth trajectory, because low inflation means less liquidity in equity and debt markets. Subdued consumer demand also discourages business from increasing capital expenditure.
Indian Currency Depreciation
The declining trend of the exchange rate value of the rupee is affecting the country’s economy, making imports expensive. However, some imports, such as oil, cannot be reduced, negatively impacting the current account deficit of the country. The rupee is expected to depreciate further over concerns about the US-China trade war, a slowdown in global trade, foreign institutional investment (FII) outflow pressures, rising crude oil prices, and the political uncertainty.
India’s National Manufacturing Policy
India’s National Manufacturing Policy (NMP) aims to lift the manufacturing sector and has set a target of 25 percent share of GDP within a decade and creating 100 million jobs. The policy also aims to enhance the manufacturing sector’s global competitiveness. Some of the state initiatives in the NMP include setting up a national manufacturing and investment zone (NMIZ) to promote investments in the manufacturing sector, promoting green technologies, promoting skill development programs to cater to the needs of the manufacturing sector, and such others. The policy should enable the country to emerge as a global manufacturing hub with extended forward and backward integration with the global supply chain.
While the state can only create the necessary policy ambience, the key players who can exploit the growth opportunities are the industry thought leaders. Meeting the consumer demand, which continues to remain relatively good compared with many other countries, rests with the industrial companies and the strategies they adopt to fulfill the demand while protecting their margins. While there is further scope to refine it, the state has played its part by announcing the NMP.
CapEx Trend by Industry
India’s economic growth continues to propel demand for fuel, energy, and basic materials. CapEx as a percentage of revenue seems to be higher for the electric power industry, with NTPC and Power Grid Corporation of India Ltd. (PGCIL) sharing the majority of the capital investments for generation and transmission, respectively. The oil & gas and refining and chemical industries are major investors in capital assets and made significant capital investments in 2017 and 2018.
The production of automobiles has grown with passenger vehicles, commercial vehicles, and two-wheelers registering a growth of 6.3 percent in April-March 2019 over April-March 2018. However, automobile sales dropped to 5.1 percent in April-March 2019 over April-March 2018 when compared to 14.3 percent growth in April-March 2018 over April-March 2017.
Trends and Outlook
FY 2018-2019 started on a positive note, however in the second half of the year the market softened substantially and even the festive season did not witness any revival of consumer interest. Slow economic activity, increased cost of vehicle ownership, a drop in the purchasing power of people, high GST rates, stagnant wages, and liquidity concerns all affected automotive sales in India. Production cuts by automakers have resulted in job losses in vehicle manufacturing, component making, and vehicle distribution industries. The automotive sector contributes nearly 50 percent to the manufacturing GDP and employs approximately 37 million people. According to the Society of Indian Automobile Manufacturers, 15,000 contractual manufacturing jobs have been lost and 200,000 jobs lost in automotive retail. Given the present situation, the government must consider lowering GST rates on automobiles to trigger sales.
Due to rising concerns over air pollution levels in India, the Government has been forced to leapfrog from BS IV to BS VI emission standards to reduce vehicular pollution. BS VI, the most advanced emission standard for automobiles, is equivalent to Euro VI, which has already been implemented across countries in Europe. No BS IV vehicle will be sold across the country after April 1, 2020. Automakers are transitioning towards changing over the entire range of vehicles to BS VI.
Auto makers in India produce the entire range of passenger vehicles: multi-utility vehicles (MUVs), sports utility vehicles (SUVs), commercial vehicles, trucks, buses, tractors including farm, earthmoving, and construction equipment, and two- and three-wheelers. The country is becoming a global hub for automotive manufacturing, with increasing presence of the world’s top auto majors.
Capital spending in the automotive industry is around 1 percent of revenue. Out of the total CapEx, the automotive industry spends around 44 percent on plants and machinery. The overall revenue has been increasing since 2013. The sales-per-asset showed a marginal rise in 2015 and remained more-or-less stagnant after that. This could be due to the gradual build-up of excess capacity in 2015, and surprisingly more capacity addition in 2018, albeit at a slower rate, as vehicle makers anticipate domestic demand to pick up.
The cement industry in India is expected to increase its total installed capacity to about 522 million tons per annum (mtpa) by 2019-2021, from the current capacity of more than 502 mtpa and retain its position as the world’s second largest cement producer. As stated by the Department of Industrial Policy and Promotion (DIPP), cement and gypsum products attracted FDI worth $5.28 billion between April 2000 and March 2018.
Trends and Outlook
The escalating demand for housing and office complexes, hotels, hospitals, roads & highways, multiplexes, industrial construction, and so on is likely to spur the growth of the cement industry in India. High demand, increasing investments, and long-term potential has attracted investments in this industry. Cement majors in the country are expected to grow by around 6 percent. The industry’s dominant players include large domestic companies such as UltraTech, Shree, JK, ACC, and Jaypee. Global cement majors with a large domestic presence include LafargeHolcim, Italcementi, and Heidelberg. Global companies entered the Indian market in the last decade lured by the opportunities in this industry. Some also plan to add production capacities through new projects or brownfield project expansions.
According to the ARC India CapEx index, the capital spending in the cement industry is around 2 percent of revenue. Out of this total CapEx, the industry spends about 42 percent on plants and machinery. The CapEx spending has seen a downhill trend since 2014. The sales/asset ratio improved slightly in 2018 as demand outpaced capacity additions. FY 2020-2021 is expected to have limited capacity addition. This should increase the asset utilization to 71 percent, compared to 65 percent in FY 2018-2019.
Chemical and Petrochemical
India’s chemical and petrochemical industry accounted for 3 percent of the global chemical industry in FY 2018-2019. India was the world’s third largest consumer of polymers and the fourth largest producer of agrochemicals. It was the world’s sixth largest producer in terms of revenue and the twelfth largest in terms of volume during the period. India is a strong global dye supplier, accounting for approximately 16 percent of the world’s production of dyestuff and dye intermediates.
The industry, having a large domestic demand potential and a diversified manufacturing base to produce quality chemicals, is likely to grow at 14 percent per annum and expected to exceed $350 billion by 2021. The chemical sector accounted for 13-14 percent of total exports and 8-9 percent of total imports in India.
Trends and Outlook
The expanding domestic market for automobiles, consumer durables, textiles, and such others is stimulating the demand for petrochemicals. Fine chemicals, dyes and intermediates, and knowledge-based chemicals also play a significant role in driving the growth of India’s chemical industry.
The total production of chemicals and petrochemicals stood at 27,847 MT during FY 2018-2019, a 4 percent increase over FY 2017-2018. The demand for chemical products is expected to grow at approximately 9 percent per annum over the next five years. The petrochemical demand is expected to grow at 7.5 percent CAGR from 2019-2023, with polymer demand growing at 8 percent.
According to the ARC India CapEx index, capital spending in the chemical & petrochemical industry is around 6 percent of revenue. Out of the total CapEx, this industry spends around 23 percent on plants and machinery. Post 2015, the capacity addition has declined. The sluggish conditions in the global chemical industry have also impacted the Indian chemical industry. However, Indian companies have the opportunity to increase the utilization rate of their existing assets and improve sales per asset by catering to both the foreign and growing domestic market.
The electric power sector in India is witnessing several changes and new trends. The country’s installed capacity for electricity generation has increased from 174.64 GW in March 2009 to 356 GW in March 2019; this was the fifth largest in terms of installed capacity globally, and third in terms of power generation and power consumption. The government targets capacity addition of around 100 GW under the 13th Five-Year Plan (2017-2022). India’s power sector is forecasted to attract investments worth $130 billion between 2019-2023.
Trends and Outlook
Lately, we’ve witnessed an unprecedented price drop in the solar power sector in the country. The costs of building large-scale solar installations in India fell by 27 percent in 2018. On the other hand, falling capacity utilization of power generation plants is compelling the industry to come up with innovative technical solutions. These include upgrades and modernization to bring more flexibility into operations to enable quick ramp up or ramp down.
Increased economic activity, especially in manufacturing, along with favorable government policy, drive steady growth in electric demand. The government has introduced and refurbished a series of schemes and policies to strengthen the power sector. The Ujwal DISCOM Assurance Yojana (UDAY) scheme focuses on improving the financial health of the electricity distribution companies. The government is promoting awareness on energy efficiency and power saving. The industry has been deeply involved in the successful implementation of Deendayal Upadhyaya Gram Jyoti Yojana UJALA. This has resulted in energy savings of more than 2.66 crore kWh every day, a reduction of over 21,550 tonnes of CO2 per day, and is estimated to have a cost savings of $1.39 million per day.
India’s electric power industry needs to explore the benefits of investing in distributed generation, smart grid, and other verticals. The government has set an ambitious target of having 175 GW of clean energy capacity by 2022, including 100 GW solar and 60 GW of wind energy.
Renewable industry presently constitutes around 21 percent of the total installed base and is on an accelerated growth path in both solar power and wind power generating plants. Presently, India's clean energy capacity is 1,096 GW.
According to the ARC India CapEx index, capital spending in the power industry is 18 percent of revenue. Out of this total CapEx, the industry spends over 58 percent on plants and machinery. The planned CapEx in renewable power is expected over the medium to long term, it remains to be seen how the gap between demand and supply is met using both thermal and renewable power. If renewable power is not scaling up as planned, then capital investments in nuclear and thermal power plants will again pick up.
Investments in infrastructure for upgrading urban infrastructure, ports, airports, roadways, and railways will increase the demand for the metal industry in India. To meet this domestic demand, India is planning to triple local steel production over the next decade. This would give a boost to local steel companies as well as attract investments from global majors.
Trends and Outlook
As of 2018, India became the world’s second largest steel producer, replacing Japan in this position. The country is expected to surpass the US to become the world’s second largest steel consumer in 2019. According to the Indian Steel Association, steel demand is expected to grow by over 7 percent in both FY 2019-2020 and FY 2020-2021. In FY 2018-2019, India produced 131.57 million tonnes (MT) and 106.56 MT of gross finished steel and crude steel, respectively.
Demand for iron and steel should continue, given the strong growth expectations for the residential and commercial building industry. India ranks fourth in terms of iron ore production globally. In FY 2018-2019, production of iron ore stood at 210 million tonnes. India has around 8 percent of the world’s deposits of iron ore. Iron and steel make up a core component of the real estate sector. Infrastructure projects continue to provide business opportunities for steel, zinc, and aluminum producers. Aluminum production is forecasted to grow to 3.33 million metric tonnes by FY 2020-2021. Demand for these metals is set to continue given strong growth expectations for the residential and commercial building industry. The construction and upgrade of ports and other maritime infrastructure will continue to require large quantities of steel. However, slowdown of the automotive industry and global trade war will impact the steel industry in FY 2020-2021.
The growing CapEx trend of companies in the industry creates huge opportunities for automation suppliers in India. According to the ARC India CapEx index, capital spending in the metals industry is about 3 percent of revenue. Out of this total CapEx, the industry spends over 53 percent on plants and machinery. While the industry has been experiencing overcapacity in the last few years, the revenues and asset utilization levels picked up in 2018. This was mainly due to improved plant utilization levels and domestic business environment.
Table of Contents
- Executive Overview
- CapEx Trend by Industry
- Chemical and Petrochemical
- Electric Power
- Oil & Gas and Refining
- Food & Beverage
ARC Advisory Group clients can view the complete report at ARC Client Portal
If you would like to buy this report or obtain information about how to become a client, please Contact Us