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Economy: Trend in investments

Feb 24, 2009

Liquidity is a major concern corporate India is facing in present times. In addition, there are issues related to future demand and increasing inventory buildups. Delayed payments from customers leading to increasing working capital cycles have led companies to increase their debt (for working capital) levels in order to manage daily operations. Liquidity and capital raising issues have led companies to think twice about their expansion and capex plans. Over the past few quarters, we have seen a drastic change in the nature of investments within the country as compared to the earlier high growth period.

While the growth in number of new projects has been slowing, the average size and value of these projects has been growing. Similar has been the case with projects that have been shelved. As we can see from the table below, post September 2007 the number of projects that have been shelved has shot up.


(Source: CMIE)

(Source: CMIE)

The reasons behind the slowdown in allocation of new projects and shelving of older ones can be attributed to the overall economic slowdown and fund raising issues. According to the Centre for Monitoring Indian Economy (CMIE), only a few projects were stalled due to other reasons like delay in government clearances, court cases or problems related to land acquisition.

Some positives to point out
If we consider the total number of outstanding investments, it wouldn't seem as if the country is going through a slowdown. Especially when compared to the previous year. The total number of outstanding investments at the end of December 2008 stood at Rs 80.7 trillion, higher by 41% YoY as compared to the total outstanding investments at the end of December 2007.

Conclusion
We believe the real impact of the economic slowdown globally and in India is likely to hit Indian infrastructure sector and related companies going forward. While we may see more projects going on hold rather than being shelved, as per our understanding in management interactions, it seems as if execution of these projects will be extended so that companies can curtail the impact of the slowdown.

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