Structural shift in new investment in favour of buying aircraft

by Mahesh Vyas

New investment proposals were low during the quarter ended June 2017. Investments worth only Rs.1.35 trillion were proposed during this quarter. This is quite low compared to the average new investments witnessed in recent times, which is close to Rs.2.2 trillion per quarter.

This is not a one-off fall in new investment proposals. It in fact, reflects a clear stagnation in new investment proposals in nominal terms through 2016 and also an indication of a falling trend emerging in 2017.

The trend seems to suggest a structural shift in investments away from industry to services and within services essentially to aviation and communications. This shift is, prima facie, less employment generating. Further, investments in manufacturing and electricity are unlikely to recover from the fall seen in recent years. These two sectors account for a substantial share in overall investments and their direction determines the overall trend in investments. The rise in services cannot offset the fall in industrial investments.

These trends are evident in the average of trailing four quarters of quarterly new investment proposals. The discussion below is based on the average of trailing four quarters of each quarter.

New investments picked up immediately upon the establishment of the new Modi government in May 2014. A clear rising trend was visible from the quarter ended September 2014 through June 2015. Average quarterly new investments crossed Rs.2.5 trillion. Then, the trend dipped and recovered only partly to stabilise at a lower level, of around Rs.2.2 trillion in 2016. By 2017, the trend was down to Rs.2 trillion per quarter.

New investments into manufacturing industries have been sliding down a steep gradient. As a result, its share in total new investment proposals has dropped from over 50 per cent to almost a quarter. Metals has been the main driver of manufacturing investments in the past three years. It was the pick up in investments in metals that helped raise the share of manufacturing in total new investments. During 2017 so far, metals accounts for about half of the total investments into manufacturing. However, the pick-up in new investments in metals is not entirely robust. First, these new investments merely offset some large exits, such as POSCO. Besides, they are vulnerable to the challenges of environmental clearances and land acquisition.

Investments into manufacturing would need to be far more widespread across more downstream industries to indicate that investments are picking up. For now, it is the falling trend that seems to dominate.

New investments into mining recovered in 2017 after having fallen steadily and steeply to negligible levels by the end of 2016. These are too small to make a difference to the overall investments trend.

The electricity sector has been one of the prime drivers of the overall investments cycle in India. India moved aggressively to overcome its chronic power shortages through private sector partnerships, announcing of ultra mega power projects and then more recently, a major push into solar power. However, now, power shortages have reduced. As a result, investment into power generation has dropped sharply. Power projects accounted for a third of total investments in 2014. Its share has since dropped to less than 10 per cent.

Nothing suggests that this declining trend in electricity will be reversed soon. Power plants continue to run on low capacity utilisation levels.

The services sector has been seeing a steadily rising trend in new investments during 2016 and 2017. The services sector is a collection of several sub-sectors. Of these, it is the transport sector that is driving the ramp-up in new investments in the past two years. The transport sector in turn comprises aviation, roads, ports, etc.

Aviation has been the biggest source of new investment proposals under transport services. This is mostly purchase of aircraft. During 2016 and 2017 this has been a major contributor to new investments. This increased investment into the purchase of new aircraft does reflect the currently high demand for air travel.

In both, the first and second quarters of 2017, purchase of aircraft accounted for over one-quarter of the total new investments announced. These large investments do not create matching additional demand as the investments mostly lead to imports.

A second source of an increase in investment in the services sector is communication. This is essentially the investment made by Reliance in Jio. This is unlikely to continue at the scale seen recently.

It is apparent that there has been a structural shift in the sectoral distribution of investments - from electricity and manufacturing to the purchase of aircraft and telecommunication. And, the overall trend is of a decline in new investments.

Unemployment Rate
Per cent
5.9 -0.1
Consumer Sentiments Index
Base September-December 2015
96.0 +0.2
Consumer Expectations Index
Base September-December 2015
96.5 +0.3
Current Economic Conditions Index
Base September-December 2015
95.0 0.0
Quarterly CapeEx Aggregates
(Rs.trillion) Jun 17 Sep 17 Dec 17 Mar 18
New projects 2.50 1.23 1.34 2.78
Completed projects 0.87 1.24 1.11 1.35
Stalled projects 2.68 0.69 0.88 3.41
Revived projects 0.23 0.34 0.22 0.24
Implementation stalled projects 0.76 0.78 0.71 1.05
Updated on: 19 Jun 2018 8:20PM
Quarterly Financials of Listed Companies
(% change) Jun 17 Sep 17 Dec 17 Mar 18
All listed Companies
 Income 9.6 7.9 11.9 10.7
 Expenses 9.9 9.0 13.0 17.3
 Net profit -19.8 -18.0 -14.3 -78.4
 PAT margin (%) 5.3 5.5 4.8 1.4
 Count of Cos. 4,512 4,498 4,486 4,225
Non-financial Companies
 Income 10.2 8.2 13.3 12.4
 Expenses 10.5 8.1 12.3 13.0
 Net profit -25.1 -6.0 13.1 1.4
 PAT margin (%) 5.2 6.2 6.4 6.8
 Net fixed assets 9.2 11.9
 Current assets 78.6 8.4
 Current liabilities 11.0 10.7
 Borrowings 10.4 1.4
 Reserves & surplus 5.2 8.1
 Count of Cos. 3,480 3,467 3,469 3,275
Numbers are net of P&E
Updated on: 19 Jun 2018 8:21PM
Annual Financials of All Companies
(% change) FY15 FY16 FY17 FY18
All Companies
 Income 5.6 1.8 5.6 5.5
 Expenses 5.7 1.9 5.6 6.2
 Net profit 0.0 -10.0 26.3 0.9
 PAT margin (%) 3.0 2.8 3.5 12.0
 Assets 9.5 10.1 7.2 18.5
 Net worth 8.5 11.3 6.8 5.4
 RONW (%) 5.8 4.9 5.9 13.6
 Count of Cos. 25,852 24,013 21,375 64
Non-financial Companies
 Income 4.8 1.0 5.4 4.0
 Expenses 5.0 0.3 5.7 1.6
 Net profit -8.2 19.2 21.2 18.3
 PAT margin (%) 2.0 2.4 3.0 16.5
 Net fixed assets 13.3 17.2 6.2 5.2
 Net worth 6.9 12.0 5.5 -2.4
 RONW (%) 4.6 5.1 6.1 21.6
 Debt / Equity (times) 1.1 1.1 1.0 0.1
 Interest cover (times) 1.9 1.9 2.1 34.4
 Net working capital cycle (days) 66 65 62 43
 Count of Cos. 21,088 20,114 17,854 48
Numbers are net of P&E
Updated on: 04 Jun 2018 11:54AM