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Investment scenario marred by uncertainty - Views on News from Equitymaster
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  • Aug 26, 2009

    Investment scenario marred by uncertainty

    Looking at the trend in investments over the past few quarters, it does really give a mixed idea about what corporate India is going through. During the past few quarters, companies across industries were facing various issues - liquidity, concerns of lowering demand, excess supply, increasing inventory buildups. Also, issues related to delayed payments from customers led to increasing working capital cycles. This led companies to increase their debt (for working capital) levels in order to manage daily operations.

    The general consensus is that the slowdown in economic activity has led many companies to resort to either canceling their expansion plans or deferring them.

    However, going by the data published by the Centre for Monitoring Indian Economy (CMIE), there has been a drastic shift in the investment trend during the past few quarters. To put things in perspective we shall take a look at the chart below.

    New investments over the past few quarters
    Data Source: CMIE

    If we look at the above chart, we can observe that while the total investments have remained robust (barring the quarter ending June 2009), the number of new projects have fallen. This indirectly means that the average size of each project has been on a rise. According to CMIE, huge capacities are being built in various industries, with the key ones being auto, power (generation and T&D), steel, cement, amongst others.

    However, during the quarter ending June 2009, new investments have slumped considerably. As compared to the high of Rs 8.2 trillion in the quarter ending March 2009, the value of new projects has dropped to Rs 1.4 trillion in the latest quarter. This is in fact (as can be seen above) the lowest amount of new projects announced during the past three years. Does this indicate that this is the beginning of the after effects of the credit crunch and slowdown? Well, it is too soon to say.

    But an assumption that we can make here is that a huge chunk of the investments that were planned to be executed in the quarter ending June 2009 have been shifted to the earlier quarter. This we say because there was an exceptional rise in new projects in the quarter ending March 2009.

    However, total investments are still growing
    Data Source: CMIE

    The chart displayed above shows the trend in total outstanding investments since June 2006. The number of projects has also moved in tandem. The total number of outstanding investments at the end of June 2009 stood at Rs 89.9 trillion, higher by 30% YoY as compared to the total outstanding investments at the end of June 2008.

    While the total number of investments outstanding has been on the rise, so has the number of projects that have been shelved. During the quarter ending June 2009, nearly 61 projects were cancelled. However, on the flipside the average size of a project that got canceled stood at Rs 0.8 bn. This is much lower when compared to the average size of shelved projects - Rs 11 bn - during the previous four quarters

    Further, CMIE also reported that nearly 49 projects were stalled in the quarter ended June 2009. These projects envisaged investments of Rs 1.2 trillion. A large chunk of this amount was on account of the delay in the Rs 300 bn Maha Mumbai SEZ project.

    Many projects have gone offtrack...
    Data Source: CMIE

    The fact that the numbers of new projects is still significantly larger than the amount of projects getting cancelled augurs well for India Inc. However, a large portion will depend on how fast the projects get executed. CMIE expects a sizeable amount of projects that are envisaged to be completed in FY10 to spill over to FY11. This, according to the agency, will likely be seen in projects of few industries such as power, oil & gas and auto (commercial vehicles).



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