Sunday, March 28, 2010

INDIA MOVING Rs 7,00,000 cr BIG BANG & that is $ 155.55 bn....

That's India's capex next fiscal year. Where will this money come from? FDI, ECBs, Japanese banks, domestic markets, local banks, mutual funds and your pocket...

INDIA is roaring towards an infrastructure boom and plenty of jobs will be created like never before as capital expenditure in the next financial year is expected to double to a whopping Rs 7,00,000 crore, or about 10 per cent of the expected gross domestic product of about Rs 70,00,000 crore.
Companies in auto, power, railways, irrigation, airports and ports sectors are on a major expansion spree and Indian banks and financial institutions are pooling in resources.
But this may not be enough and some bankers expect companies to access other financing avenues such as capital markets and overseas borrowing. Yet others feel that financial closure of many projects might have already been achieved and the implementation might not lead to fresh sanctions.
There is an overall economic recovery, thanks to improving operating profits and favourable equity market conditions this year. Almost every infrastructure sector is witnessing investments driven largely due to government support.
Both Crisil and the Centre for Monitoring Indian Economy have nearly doubled their capital expenditure (capex) estimates for the next fiscal year to a whopping Rs 6,60,000 crore and Rs 7,00,000 crore, respectively.
“Every capacity addition activity leads to job creation, it cannot be a jobless growth. I cannot put a number on how many jobs would be created from the projected Rs 7,00,000 crore capex spending during 2010-11, but for every industrial job created, the multiplier effect in the form of other jobs like contracts, etc, is 1:4,“ says Ajit Ranade, chief economist of Aditya Birla group.
A recent Morgan Stanley report titled `The Next Theme: Shift from Consumption to Investment' said several indicators, such as a widening trade deficit, rising industrial growth, low capital spending, low cost of capital, improving corporate profits and strong corporate balance sheets, suggest that the capex cycle is coming back.
According to the Morgan Stanley report, the growth cycle has been led by consumption and stock performance has been skewed towards the consumer discretionary sector compared with industrials or stocks exposed to the investment cycle. “The key debate is whether the relative performance between the two is likely to shift in favour of industrials,“ the report added.
“In the previous ratehike cycle of 2004, industrials were the second best performing sector behind banks. We expect a repetition of this in 2010, as growth is strong, and indications are that the Reserve Bank of India has made its move to anchor inflation expectations,“ the report added.
Auto and power sector lead the pack of sectors setting up new projects. NTPC said it aims to expand coalbased capacity by 4,100 mw in the next financial year for about Rs 16,400 crore. Manoj Mohta, head of Crisil Research, said new capacities are expected to be added in the auto sector due to improvement in business and economic environment.
Mahindra & Mahindra has just completed a plant at Chakan, near Pune, to make three lakh vehicles a year with an investment of Rs 2,500 crore while Tata Motors is fast moving with its small car project at Sanand in Gujarat where the investment is about Rs 1,500 crore. French carmaker Renault Nissan is investing $990 million to make four lakh vehicles a year at full capacity in Chennai.
Maruti Suzuki has announced an investment of around Rs 2,500 crore to supplement engine and plant capacities and set up a research and development centre at Rohtak in Haryana. The company also plans to invest Rs 1,750 crore to expand capacity of its Manesar plant in Haryana to 2.5 lakh units a year in two years. At present, Maruti makes 10 lakh cars a year in Manesar and Gurgaon.
Companies are also fast completing financial closures of their projects.
Some recent financial closure announcements covered JSW Energy's Rs 4,200 crore power projects, GVK Power's Rs 3,200 crore Goindal power project in Punjab and Tata Realty and Infrastructure's Rs 1,370 crore maiden venture into highways. IRB Infrastructure on Tuesday announced Rs 1,824 crore financial closure for two highway projects.
“Orders that were not executed for want of financial closures in the last quarter would implemented in the coming year,“ said V V Paranjape, director at Siemens India. However, he is cautious on a full-fledged investment. “The demand would pick up, but with a time lag of 6-12 months, as companies would wait for consistent and full capacity utilisation before they go for huge capex,“ Paranjape said.
“Order books of companies in capital goods space are piling up,“ said Riyaz Ahmed Khan, a macroeconomist at CMIE. For instance, the governmentowned Bhel's current order book is worth Rs 140,000 crore.
But the steel sector presents a mixed bag. Posco and ArcelorMittal's inability to start their mega projects on time has not deterred others from making Orissa as their most-favoured destination.
In the past 24 hours, Tata Steel and Jindal Steel and Power have announced intentions to invest in the state. While Jindal has decided to invest Rs 47,000 crore in Orissa in a coal-toliquid fuel plant and a 2,000 mw thermal power plant, Tata will invest close to Rs 21,000 crore in a four-yearold project in Kalinganagar.
Tata Steel's chief of corporate communications Sanjay Chowdhary said, “We have received 80 per cent of the required land from the state government and the balance will be received soon. We will start construction work next month.“
Jindal Steel managing director Naveen Jindal said in Bhubaneshwar on Tuesday, after meeting Orissa chief minister Naveen Patnaik, that an agreement would be signed with the state government in two to three months. According to him, different processes and technology would be used to convert coal into liquid fuels such as gasoline and diesel.
Another Jindal official said they were also building a 12.5 million-tonne steel plant, a 1,320mw power plant and an industrial complex in Angul, Orissa.
A senior Orissa government official told Financial Chronicle that his state has received an investment proposal worth Rs 101,100 crore from Jindal. He said the company has been allocated a coal block in Angul district by the central government and the company is now seeking about 2,000 hectares for the project.
“The company has already placed orders worth Rs 6,373 crore for equipment and civil structures. The first consignment of equipment has reached Kalinganagar from Germany recently,“ Chowdhary said, adding that “more equipment will arrive in the next three to four days.“ Vipul Sanghvi, president of institutional equity sales at Religare Capital Markets, said major parts of unexecuted orders of the current five-year plan are expected to be executed in coming months.
“The focus will be on execution. Companies in sectors such as capital goods, banks and heavy engineering will benefit,“ he said.
For such huge capital expenditure, funding is not going to be a problem for India Inc.
“There would be huge money coming as foreign direct investment in the next fiscal while the external commercial borrowing norms are expected to be relaxed further. Besides, India's savings rate is 34-35 per cent of GDP , which translates into huge savings at the projected Rs 70,00,000 crore GDP for fiscal 2010-11. Hence I think, despite having high borrowing plans from the India Inc, capex spending by private and public sectors could be easily absorbed,“ says Ranade of Aditya Birla.
Mohta of Crisil expects credit growth from banks to grow from 16 per cent this year to 19 per cent in the next. “Further, companies with stronger balance sheets will have other avenues such as ECBs and equity markets to raise funds due to improvement in market conditions.“
Bankers, however, said domestic credit may be insufficient to fund huge capex programmes. “Japanese banks are flush with funds and Indian companies are tapping them significantly,“ a Bank of Baroda official said, adding that they only fund highly rated firms.
A senior IDFC official echoed the view: “Companies will actively tap the ECB route to raise money as it may not be possible to fund the requirements entirely from domestic resources.“
“Obviously, when capex goes up, there will be higher offtake of credit from the banking system,“ M D Mallya, chairman and managing director of Bank of Baroda, toldFinancial Chronicle. He, however, said that many projects might be long-gestation ones where withdrawals would be spread over a period of time and thus might not lead to a sudden surge in offtake.
S A Bhat, chairman and managing director of Indian Overseas Bank, said a large number of projects, especially in the infrastructure sector, might have already achieved financial closure, and hence such capex might not reflect in fresh sanctions during 2010-11.
“Capital expenditure starts when projects get implemented on the ground. A number of these projects, especially in the infrastructure sector, have achieved financial closure, where actual disbursement has not started. If this constitutes the bulk of the Rs 700,00 crore, there will be no fresh sanctions and hence no major impact on credit offtake figures for the year. It will be necessary to have a break-up of the Rs 700,000 crore to get a clear picture,“ he said.
Arun Kaul, executive director of Central Bank of India, pointed out that promoters might access sources other than bank financing.“The demand for funds will be there but not necessarily from the banking system. It could be raised from the capital market, the debt market and overseas funding. Some companies are taking loans from mutual funds,“ he said.
He pointed out that even if the Rs 350,000 crore capex for the current financial year was taken into consideration, it was not reflecting in higher credit offtake.
“If the estimate is that Rs 350,000 crore capex is taking place this year, we are not seeing much demand,“ Kaul added. But IOB's Bhat and Central Bank's Kaul also said credit offtake next year would be higher.
“We will end up this year with credit growth lower than the industry average.
However, we are expecting the growth to be much higher next year compared to this year growth,“ Bhat said, without indicating any figures.
“Overall, we expect demand for credit to show a healthy pick up. Next year would be better than this year,“ Kaul added.
R S Reddy, chairman and managing director of Andhra Bank, said a true picture of credit offtake would come from RBI. “The issue is not very clear. A clearer picture will emerge in RBI's credit policy in April.“
“In our bank, we expect 25 per cent credit growth at the end of March 2010. An increase in credit offtake in the region of 25-30 per cent can be anticipated next year,“ Reddy said.
However, he pointed out that corporate credit offtake has been slow. “We are seeing healthy credit offtake in retail, agricultural and MSME (micro small and medium enterprises) loans.


Corporate credit has not reached a level where we can call it significant,“ he added.
(With inputs from Rupesh Subhash Janve, Manju AB, Sarita C Singh & Sanjeev Sharma)
rajeshabraham @mydigitalfc.com
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rajeshabraham @mydigitalfc.com

My Comments:
INDIA MOVING Rs 7,00,000 cr BIG BANG & that is $ 155.55 bn......that is what I wrote at the heading...$155.55 bn...Wow!.....so what to speak about $17 bn invested last year?It is just peanuts.....and how it is going to come?
FDI, ECBs, Japanese banks, domestic markets, local banks, mutual funds and your pocket.......so it means that we have not enough money to lend and invest hence overseas money will be coming in to help built our economy......
Power and Infra sector is going to be the front runner.......and in comes..all sectors.....Capital Goods,Steel, Cement,Auto etc etc.....

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