10 Sep 2012 1:56 PM from CapEx
Mahesh Vyas

Sharp increase in new investment proposals in automobiles

Petroleum refining, roads and food products post handsome increases in 2011-12

What did the automobile industry see that others did not? They and associated industries displayed tremendous optimism on India’s growth potential when most others were extremely cautious in the recent past.

It is by now a well-established fact that new investment proposals have fallen to a trickle compared to their levels prior to 2008. In 2011-12, new investment proposals were worth Rs.10 billion, which is less than half such proposals in 2007-08 (Rs.21 billion) and also in 2008-09 (Rs.23 billion). These were also merely two-thirds of what they were in 2009-10 and 2010-11.

But, in the midst of this sharp fall in new investment proposals the automobile industry shows a lot of optimism.

Investment proposals to set up new automobile capacities were up 160 per cent in 2011-12 compared to the proposals made in the preceding year. At an aggregate of Rs.100 billion, these were much higher than the Rs.39 billion in 2010-11 and comparable to the Rs.111 billion worth of new investment proposals made in 2008-09. The aggregate investment proposal in 2011-12 is still 50 per cent lower than the proposals made during the boom years between 2005-06 and 2008-09. Yet, they reflect a confidence in the future demand for personal transport from consumers in India.

Renault-Nissan proposes to set up a new unit in Kancheepuram district of Tamil Nadu to produce 400,000 cars at a cost of Rs.27 billion. Reports also suggested that the capacity could go up to 800,000 cars. Suzuki Motorcycle India proposed and started implementation of a plant in Rohtak to produce 500,000 two-wheelers at a cost of Rs.20 billion. Honda Motorcycles proposes to set up its fourth plant to produce two-wheelers at a cost of Rs.10 billion.

Such optimism was not seen in many other industries in 2011-12. The automobile industry not only struck a different note in the year but even persisted with the same in 2012-13. In the first quarter of the year, the industry’s investment was higher than the average quarterly investments made by it in the preceding two years.

While most of the investments proposed in 2011-12 were in the passenger cars and two-wheeler industries, in the first quarter of 2012-13, the largest investment proposed was in the commercial vehicles segment. This is in spite of the substantial downturn in this industry in recent months. Daimler India signed an MoU with the Tamil Nadu Chief Minister to invest Rs.15 billion to expand its capacity. Investment proposals for two-wheeler plants matched the investment in commercial vehicles although these were distributed over 5 projects.

The confidence of the automobile manufacturers is more than matched by the petroleum refining companies. New investment proposals worth Rs.1,212 billion were made during 2011-12 to build new petroleum refining capacity in the country. This is the highest level of new investments proposed in the industry in any year in the past. It is a seven-fold increase from the proposals made in 2010-11.

Indian Oil Corporation proposes to set up a Rs.300 billion refinery-cum- petrochemical complex in Gujarat (or possibly Maharashtra) and the BR Shetty group of Abu Dhabi (International Petroleum Investment Co) proposes to set up a Rs.300 billion refinery in Andhra Pradesh, possibly in the Kakinada-Vizag corridor. Nagarjuna Oil Corporation plans to set up a refinery in Cuddalore in Andhra Pradesh at a cost Rs.120 billion. Four of the 13 refineries proposed in 2011-12 were in Andhra Pradesh and three were in Gujarat. In the first quarter of 2012-13, Mangalore Refinery announced its plans to expand its capacity in southern Karnataka at a cost Rs.85 billion.

The sharp increases seen in new investment proposals of these related manufacturing industries is in the face of a 22 per cent fall in new proposals in the manufacturing sector as a whole. This is what makes these investments remarkable.

Proposals to investment in road transport services (essentially in the building of roads, bridges, etc.) grew more modestly by 14 per cent in 2011-12. Yet, this is a marked improvement over the 36 per cent fall in overall investment proposals during the year. And, particularly so when all other modes of transport (railways, air transport and shipping) saw a fall in new investment proposals.

Very few industries other than the three mentioned above saw an increase in new investment proposals in 2011-12. Interestingly, they include iron ore mining and pelletisation projects; some of which are in Karnataka. Other industries that saw a rise in new investment proposals were food products, storage & distribution of LNG and irrigation.

All other industries saw a decline in new investment proposals in 2011-12 - most of them saw very sharp declines as the overall fall in new investment proposals during the year was a substantial 36 per cent. And, in the midst of such gloom, the automobile industry was upbeat with refineries to boost and roads to pave the way forward.