Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2019 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?  

Have the Capacity Utilisation Rates Bottomed Out?
Mon, 23 May Pre-Open

The extent to which the productive capacity of a plant or a firm has been utilized is measured by the Capacity Utilisation levels. It is a key indicator of the current level of productivity and potential for future investments. This indicates the company's ability to actually utilize its present total installed capacity. The trends in movement of capacity utilisation generally gives us an idea of the investment climate. An improvement in this metric could be a sign of increased demand and hence is a lead indicator for any fresh investments to be made to expand capacity.

The Reserve Bank of India on a quarterly basis provides a macro report on the capacity utilisation levels of manufacturing companies. It also provides key information such as inventory levels, finished goods levels, etc. It threw some interesting insights.

Over the past five years, the utilisation levels are on a decline, peaking in 2010-11 at 79.9%. However, since then there has been a steady drop in the numbers. The present levels recorded for Q3FY16 stood at 72.5%.

According to a report published by CARE ratings, one third of the variation in capacity utilisation is explained by the changes in manufacturing rate. i.e. the Index for Industrial Production (IIP) growth rates. Thus there is a strong relationship between both of them.

Interestingly, the utilisation levels were highest in 2010-11 when the interest rates were low with the RBI resorting to repo rate hike in the latter half of that year. The Index for Industrial Production (IIP) growth rate was also relatively high at 8-9%. The IIP numbers began to moderate from FY12 onwards, due to the increase in interest rates and a slowdown in the demand adversely affected the capacity utilisation rates.

The trend in the Index for Industrial Production can thus be one of the reliable indicators for a sign of revival in the utilisation numbers.

With over 50% of the incremental capital expenditure done in the 2013-14 period, some sectors saw overcapacity resulting in a hit to the utilization levels. Weakness in the overall demand made matters worse for the companies.

We believe that there is good news on the anvil. Higher demand for commercial vehicles particularly trucks are an early signs of a reviving economy. We can already see a small but visible recovery in demand from the improvement of utilization levels from the lowest levels of 70%.

The key metric to watch out for would be the growth in IIP numbers as it would drive utilisation rates higher. This, in turn, would kick off the capex cycle and revive growth in the Indian economy.

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 "Have the Capacity Utilisation Rates Bottomed Out?". Click here!


Views on News

How to Separate Fact from Fiction (Vivek Kaul's Diary)

Feb 5, 2019

Vern Gowdie talks about what happens when there's too much debt in the system.

A Perfect Example of Multibagger Opportunities in the Rebirth of India (The 5 Minute Wrapup)

Jan 29, 2019

A structurally strong Indian Steel Industry will help India achieve 8%+ GDP growth in the coming years.

Edelweiss Small Cap Fund: Worth Taking The Risk? (Outside View)

Jan 24, 2019

Personalfn highlights the key points of the newly launched NFO- Edelweiss Small Cap Fund and sheds light on its outlook.

'Factfulness' Has Inspired the Biggest Wealth Building Project of My Life (Profit Hunter)

Jan 17, 2019

As we began putting the pieces the pieces together, I noticed trends that were not seen in the past 5, 10, 15 and even 20 years.

The Great Leader Has Won the Cow-Teller Award and Now Wants a Case Study (Vivek Kaul's Diary)

Jan 17, 2019

This is a spoof.

More Views on News

Most Popular

Stocks that Could Be Out of Reach Post Elections(The 5 Minute Wrapup)

Apr 9, 2019

It's a matter of time before the stocks catch the fancy of the markets and big investors.

3 Indian Stocks with Amazon-Like Potential(Profit Hunter)

Apr 10, 2019

We have identified 3 stocks with huge wealth building potential which meet our 'Click of a Button' criteria.

This Company is Making a Big Comeback and You Can Now Profit from Its Example(The 5 Minute Wrapup)

Apr 10, 2019

How Dell got its mojo back.

This is Why the Stock of Jubilant FoodWorks Went Up 1,160%(The 5 Minute Wrapup)

Apr 12, 2019

This critical business strategy has enabled companies to scale their operations faster.

Pocketing Massive Gains with HDFC And HDFC Bank(Profit Hunter)

Apr 12, 2019

Here's how one could have generated gains of Rs 59,250 in 10 days by trading HDFC and HDFC Bank with a capital of Rs 4 lakh.


Get the Indian Stock Market's
Most Profitable Ideas

How To Beat Sensex Guide 2019
Get our special report, How to Beat Sensex Nearly 3X Now!
We will never sell or rent your email id.
Please read our Terms