India Inc. investments: This time its different! - Views on News from Equitymaster

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India Inc. investments: This time its different!

Aug 20, 2004

Looking at the expansion plans announced by some of the heavyweights of the Indian corporate sector, it appears as if the investment season is back in vogue. The last time an investment binge of similar magnitude happened was in the mid-nineties when India opened its doors to foreign investment. However, the euphoria did not last long as in order to curb inflationary tendencies, the RBI had to hike interest rates and the growth in demand that was expected, was soon nipped in the bud. The result was excessive capacity and pressure on profit margins. It took years of focus and financial prudence for many of the companies to come back on track. Now that the results have been achieved and the companies are witnessing days of record profits, its time they look at expansion options anew. After all, de-bottlenecking and focus on costs can only help you increase production to a certain level. One has to invest in additional capacities if one has to keep growing and going by the current trend, this exactly seems to be happening, as most of the leading companies have announced capital expansion plans.

Some key capex plans
Company Exp. Plans
Bharat Forge Doubling of forging capacity
Tata Motors Ramping up of car capacity by 50%
Maruti Setting up of diesel engine plant
Tata Steel Almost doubling of capacity by 2009
SAIL Doubling of capacity in a phased manner
Arvind Mills Ramping up of shirting as well as garment capacity

Although one does not have very happy memories of the last investment spree, we feel that the scenario this time around is much better. Let us have a look at what those reasons are:

Looking outwards:
One of the primary reasons we feel that the current expansion spree is not going to go down the drain is the outward looking approach of the Indian manufacturing sector. Unlike in mid-nineties, most of the companies today also have a large part of their demand coming from the exports market. Just to put things in perspective, the auto ancillary industry, which is increasingly becoming an important cog in the wheel of the global auto industry, or the steel industry exporting a significant part of its produce to feed the industrialization of China. Post 2005, a huge opportunity will also stare in the face of textile companies as the quota regime gets dismantled. Therefore, all these factors make one feel that even if for some reason there is a slowdown in the domestic market, companies have enough cushion to see them through and vice-versa.

Bigger bang for the buck:
One positive thing that has come out of the catastrophe of the post 1997 era is the fact that the management has now become extremely cost conscious and has improved operating parameters to a great extent. Handling of funds, especially the working capital management has also become more prudent with a low interest rate regime further easing the burden. These measures have resulted into improved profitability and higher cash from operations. Thus, while capacity expansion of the previous period was mostly debt oriented, this time around, cash generation from internal accruals is playing an important part in funding of projects. This will result into lower financial burden and shorten the gestation period of projects, further strengthening the balance sheet of companies. Also, the regulatory framework of FIs has become better and they have more autonomy in choosing their debtors.

Apart from growing organically, the companies have also not been averse to the idea of inorganic growth. Having successfully fought the multinationals on the home turf, they have become increasingly confident of their abilities and have made some big-ticket acquisition in recent times. Acquisition of Natsteel by Tata Steel, Travera by Reliance, Daewoo CV division by Tata Motors, Aventis France by Ranbaxy and Carl Den Peddinghaus by Bharat Forge are some of the examples of such overseas acquisitions. This highlights the relentless commitment of these companies towards growth. Thus, after having looked at investment scenario in recent times, one gets the feeling that Indian companies are one their way to getting bigger and stronger from here. Although there might be some near term blips such as slowing down of global economy or hike in interest rates, future prospects definitely look brighter from a long-term perspective.

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