Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2018 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Indian Stock Market News, Equity Market and Sensex Today in India | Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

Dear Visitor: Equitymaster will be under maintenance from 10:00AM to 11.30AM on Sunday, 25 March 2018. During this period, our websites will be accessible though there is a possibility of some intermittent accessibility issues. Please bear with us. We are taking yet another step to make browsing Equitymaster a much faster experience! Thank you.

Capacity utilization at a decade low
Thu, 24 Sep Pre-Open

Post financial crisis in 2008, corporates in the developed & developing nations went for massive capacity expansion. The reason for the same was low interest rates on borrowings. The interest rates in the developed countries were close to zero percent. However, in majority of cases the excess capacities have remained unutilized. Will this affect the capital expansion plans (capex) of the companies going forward?

Recently Indian Ratings (Ind-Ra) in a report stated, spending on capital expansion plans by manufacturing sector may take about two to three years. The report stated that the investments have slowed down in the past two years owing to subdued demand.

As per an article in Economic Times, earlier capex spending trends suggests that heavy capex spending usually starts when the capacity utilization nears the 90% level. However the current capacity utilization is hovering around a decade low. The report further goes on to say that with an 8% growth in demand volume, it may take around 24 to 36 months to revive the capex cycle. However if the demand does not pick up at the levels as assumed above, it would take as much as 36 to 42 months to revive the capex cycle!

The commodity prices are hovering at all-time lows. Commodity players contribute to a huge chunk of capex expense. It’s highly unlikely that commodity prices will revive in the near future. Therefore it is also unlikely that commodity players will take up large capex spending any time soon.

However, the current capex cycle may be revived by significant government spending. Usually the ‘Gross Fixed Capital Formation’ (GFCF) revives first. GFCF measures the value of acquisitions of new or existing fixed assets by the business sector and the government sector. The GFCF can be driven by significant government spending, followed by a pick-up in the private corporate spending. Currently the government spending is on the upward move, though the contribution from the private sector has not been encouraging.

Nevertheless, we believe any upturn in economic cycle and demand could be absorbed very well without any balance sheet strain as the corporates have already build up on capacities. The higher utilization levels in turn will lead to economies of scale and help companies fetch higher margins. In other words, most of the volume gains will flow directly to the bottomline and shareholder returns!

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

Read the latest Market Commentary

Equitymaster requests your view! Post a comment on "Capacity utilization at a decade low". Click here!


Small Investments
BIG Returns

Zero To Millions Guide 2018
Get our special report, Zero To Millions
(2018 Edition) Now!
We will never sell or rent your email id.
Please read our Terms


Mar 23, 2018 (Close)