India Inc. Ups Borrowing, But Not For Capex

If the largest companies of India are collectively not investing into new capacities in any meaningful measure, then claims of a revival cycle remain vacuous. It is important to understand what are the companies up to if they are not investing into new capacities even after two years of superlative profits.

While companies have not expanded their asset base in any significant quantum during the current year, they borrowed more than they did in the preceding few years. Outstanding borrowing by the corporate sector had declined 2.7% in 2020-21 and had grown by a measly 0.5% in 2021-22. In comparison, borrowing by listed companies as of September 2022 was up by a much higher 11.4%. This increase in borrowing is also seen in the RBI’s data on commercial bank’s outstanding loans data. Outstanding loans of scheduled commercial banks to industry as of September 2022 were 12.6% higher than a year ago. This is the highest growth recorded in recent times.

So, while corporates raised borrowing, they seem to have not used this to grow their fixed assets.

Statements by several bankers have indicated that there is a pick-up in the demand for credit. But, none of them mention that the growth in credit demand is from capex projects. They mention a pick-up in demand for working capital requirements.

Financial statements of companies also suggest that the borrowing is largely used to fund the increased need of working capital funds of corporates. This increase in working capital requirements is largely because of the recent increase in commodity prices.

We make an assessment of the broad sources and uses of funds by the 3,110 listed companies during the year ended September 2022. We do this using the change in the major heads of the balance sheet of these companies between September 2021 and September 2022.

Companies generated about Rs 5.8 lakh crore of internal funds through retained profits (this is essentially the increase in reserves and surplus) and they raised another Rs 70,000 crore through fresh capital. Therefore, the total funds provided by shareholders was about Rs 6.5 lakh crore. These companies raised another Rs 6.9 lakh crore though borrowing. The total long-term resources raised by corporates was therefore of the order of Rs 13.4 lakh crore.

Growth in net fixed assets consumed only Rs 2.2 lakh crore and another Rs 60,000 crore was consumed as capital work in progress. In contrast, investments into financial instruments absorbed a larger Rs 3.6 lakh crore. This pattern of deployment of resources is in continuation of the recent trend seen in corporates where they prefer to park their profits into the equity of other companies rather than deploy them to build their own fixed assets.

The biggest guzzler of financial resources was current assets such as inventories, receivables and other current assets. These claimed a massive Rs 10 lakh crore. And this was the major reason for the increase in borrowing by the corporate sector in the year ending in September 2022.

An industry-wise break-up of borrowing shows that the largest increases are in industries that could have needed substantial additional resources to fund their regular operations in the face of high commodity prices.

Borrowing by petroleum products companies shot up nearly 27%. Manufacturers of polymers and synthetic rubber saw their borrowing rise 55% and 291%, respectively. High crude oil prices is the possible reason for such large increases. These companies did not grow their fixed assets at all. Similarly, the borrowing of fertiliser companies increased 80%. These companies also import fertilisers whose prices have soared sharply in recent times.

Companies in the cosmetics, toiletries, soaps and detergents industries have also had to borrow aggressively because of an increase in the prices of raw materials such as oils. Borrowing grew 18%. Ferrous metals companies saw a 17% increase in borrowing although their net fixed assets grew less than 5%. The increase in prices of coal and iron ore explains this increase in borrowing.

Companies are quite busy managing their working capital cycles in the face of high commodity prices. Adverse working capital cycle is eating into their profits and their borrowing power is currently consumed largely into financing their operations. At the same time, capacity utilisation remains low. Order books are not afire. And, interest rates are rising. Investments into new capacities may have to wait under the circumstances.