Public sector companies have registered a sharp rise in operating cash flows (OCF) and free cash flows (FCF) and are likely to kick-off the capital expenditure and overall growth going forward, according to a Deutsche Bank report. This comes amid a tepid fourth quarter earning growth of India Inc and weak order flows.
According to the report, the bank expects a $51 billion pipeline of large orders by the public sector companies, mainly in refinery expansions, clean fuel projects etc. While capex in FY16 is likely to be of a smaller magnitude, preparatory project works have started for large-ticket orders in FY17, which will flow through to FY18.
Pointing that the OCF and FCF for Indian listed PSUs surged to a historical high of $34 billion and $9 billion for the year ended March 2015, the report said, “We estimate (this) could drive fresh capex of outlined $60 billion of large projects over FY16-18.”
Factors that provide confidence are the rise in aggregate cash flows for 60-odd sectors (barring the engineering and construction) and sharp increase in new mine clearances. Among the sectors that will lead growth are mining, road, power, housing, defence and urban infrastructure.
The report states that power generation, transmission and distribution have also picked up. Roads, urban infrastructure and water are also expected to drive capex in FY16 and first half of FY17. Smart cities, housing, defence, nuclear and LNG are some new segments that may kick-off from second half of FY17. While investment and consumption demand stood high in FY10, a rise in labour costs, along with global and domestic slowdown limited the ability of government’s balance sheet for additional countercyclical measures. But softening of oil prices has provided the much needed leverage and PSUs cash flows rose 28 per cent to a historical high of $34 billion in the year ended March 2015.
Even foreign direct investment (FDI) is on the rise. Quarterly FDI flows in Q4FY15 witnessed a sharp rebound at $4.2billion, representing a 13-quarter high and a large part of the increase was led by flows into manufacturing sectors.
The report, however, points that new credit flows from banks into new capex remains a challenge.