Corporates Defer Capex Plans As Pricing Mismatch, Economic Slowdown Bites

A slowdown in economic activity and a pricing mismatch between investors and issuers ahead of potential rate cuts has led several companies to put their capital expenditure plans on the backburner, three bankers told NDTV Profit.

While most sectors are bearing the brunt of an economic slowdown, capex heavy ones such as manufacturing, steel and cement are seen hurting more, the bankers said.

Companies such as Larsen & Toubro Ltd., Grasim Industries Ltd., UltraTech Cement Ltd. and JSW Steel Ltd. are said to have deferred their capex plans as rates in the domestic market are not conducive, one merchant banker involved in such transactions said.

Last month, L&T raised Rs 1,500 crore through a 10-year bond at a coupon of 7.19%. The company is said to have been holding back its capex funding because of a disagreement on rates between the issuer and investors.

This mismatch has come as investors want to lock in higher rates ahead of a rate cut cycle, bankers said. Also, papers of other AAA rated companies or non-banking financial companies are far more attractive, as they offer 20-40 basis points higher yield over a corporate issuance.

For example, LIC Housing Finance Ltd., an AAA rated borrower in the market raised over Rs 1,600 crore through a 10-year bond at a coupon of 7.65% in September 2024,111 bps higher than the benchmark 10-year government bond.

In August 2024, JSW Steel raised Rs 1,750 crore through a five-year bond at 8.35%. Typically, the steel company taps the debt market in October-December period, but it has also deferred its plans, the first banker said.

An email sent this week to L&T, Grasim Industries, UltraTech Cement and JSW Steel were left unanswered at the time of publishing this story.

Most of the corporate funding is either for replenishment of capex or is acquisition based, experts said.

Public sector companies have been doing the heavylifting in fund raising. In November last year, state-owned entities borrowed Rs 42,500 crore through private placement of corporate bonds, higher than Rs 37,300 crore borrowed by corporates, National Securities Depository Limited data showed.

In November 2023, private companies had raised Rs 69,200 crore through corporate bonds as compared to Rs 21,734 crore raised by state-owned entities.

Another reason companies are holding back on their fundraising plans is because they expect the RBI to cut rates in the coming months, which will bring down their borrowing cost, people said.

"Corporate issuances have not picked up meaningfully this fiscal on account of slowdown in capex and expectations of lower rates due to impending rate cuts. We expect corporate funding to pick up in the last quarter led by the infrastructure and power sector," said Prasanna Balachander group head, global markets, sales, trading and research at ICICI Bank.

Most economists expect the rate cutting cycle to start from February, with policy repo rate likely to come down to 6.0% by April. In the December policy, the Reserve Bank of India's Monetary Policy Committee delivered a cut in the cash reserve ratio by 50 bps, paving the way for a rate cut cycle in the first half of 2025, Deutsche Bank said in a report.

India's second quarter real GDP growth at 5.4% on year against expectations of 6.5% is another indicator of a slowdown in the economic activity, which took market participants by surprise.