Indian companies are finally investing in expanding production capacities and acquiring overseas companies


Three years ago, nothing seemed to be going right for the Ahmedabad-based Arvind Mills. The company had grossly overestimated demand, set up huge capacities and taken on massive amounts of debt. The result: in October 2000, rating agency Crisil downgraded its long term debt instrument to default grade. 

But that was three years ago, and things have changed dramatically for Arvind since that fateful October. In October 2003, after a complex debt restructuring programme, the company bounced back to the investment grade (BBB-). Around the same time, it commissioned a unit in Mauritius for manufacturing denim garments with an annual capacity of 1 million pieces. It now plans to expand capacity by 2.1 million pieces by March 2004. It also recently raised the capacity of its shirt manufacturing plant in Bangalore to 4.8 million pieces from 2.4 million pieces per annum. 

The Arvind story is a classic illustration of the great Indian recovery saga. India Inc, plagued by excess capacity, had its back to the wall in the late nineties and early 2000s. But corporate India used the opportunity provided by the demand recession to cut costs, streamline operations and logistics and reduce debt, thanks to a sharp reduction in interest rates. And after all these years, there are clear signs that the business cycle has turned. Demand has risen, commodity prices have moved up and the wholesale price index for manufacturing is at an eight-year high. 

Prompted by a 35 per cent jump in profits posted by the BS 1000 companies in the first half of 2003-2004, the last few months have seen India’s manufacturing leaders announcing big-ticket expansion plans entailing investments of close to Rs 150,000 crore over the next three to five years. What’s more, the the canvas for investments is wide – ranging from oil and gas to power, telecom, pharmaceuticals, auto and auto ancillaries, metals and even the hospitality industry.

The oil and gas industry leads the pack with investments of over Rs 70,000 crore. Indian Oil Corporation, the country’s largest company, alone is committing Rs 25,000 crore. The telecom industry will see investments of over Rs 35,000 crore, led by Bharat Sanchar Niganm Ltd with over Rs 16,570 crore in 2004. The power industry, helped by a reforms package, could see investments of Rs 15,000 crore, while rejuvenated steel and the non-ferrous metals companies are planning to pump in over Rs 16,000 crore.

Moreover, the investments will not just be in brownfield expansion or through de-bottlenecking, but in several new greenfield projects as well. For example, Hindustan Petroleum Corporation will set up a Rs 11,000 crore oil refinery in Punjab, the Sterlite group a Rs 4,000 crore alumina project in Orissa while Reliance Energy is finalising plans on a 3,000 mw, Rs 9,000 crore gas-based power project. 

On a smaller scale, a clutch of pharmaceuticals companies has announced greenfield active pharmaceutical ingredient units, Indian Hotels will set up a few of its proposed 12 new business hotels, while textiles major Raymond started the new year with a Rs 80 crore investment plan in two greenfield units. 

But the most encouraging trend is the attempt by India Inc to stamp its presence overseas. Already in the current year Indian companies have announced that they’re investing over $600 million (or over Rs 3,000 crore) in acquiring companies abroad. Awaiting regulatory clearances are Reliance Infocomm’s $211 million bid for Flag Telecom and Tata Motors’ $140-million odd offer for Daewoo Commercial Vehicle Company. 

AV Birla group major Hindalco has sunk over A$90 million in two copper mines Down Under while Bharat Forge has bought German forgings giant Carl Dan Peddinghaus GmbH for an undisclosed amount. That’s not all – upstream oil giant ONGC is gearing up to invest over Rs 6,000 crore in subsidiary ONGC Videsh, which has equity exposure in several exploration projects overseas, and is scouting for more. 

A lot of the brownfield expansion planned is not just to cater to the domestic market but to tap foreign markets as well. The move, companies feel, will cushion them from any demand recession within India in the future, what with the increasing acceptance of the Made in India tag overseas. For example, Hindalco is drawing up a blueprint for a major expansion in both aluminium and copper, primarily for the export market. Hyundai has announced a $250 expansion as its Indian operations will be turned into a hub for several of its global markets. A host of second-rung pharmaceutical companies are setting up new units for outsourcing contracts with MNC partners. 

The bulk of of the investments – over Rs 75,000 crore – will go into the oil and gas sector: in exploration and production, refining, and setting up and expanding the retail base. IOC’s total capital expenditure plan of Rs 25,000 crore includes investments of Rs 12,500 crore in refineries (ongoing and new schemes), Rs 2,400 crore in pipelines, Rs 1,700 crore in marketing, Rs 500 crore in R&D and Rs 7,480 crore in diversification projects like power plants, LNG plants and petrochemicals units. Hindustan Petroleum Corporation Ltd, apart from a Rs 11,000 crore new refinery, will spend over Rs 3,600 crore in upgrading existing refineries for green fuels and clean fuels, expanding the retail business and other infrastructure. 

Bharat Petroleum Corporation, which had so long shied away from the upstream sector, has now decided on a Rs 1,000-1500 crore diversification into exploration and production. Besides, its capital expenditure on refineries, pipelines and retail projects is expected to be around Rs 7,500 crore. Even Reliance Industries, which is debottlenecking its refinery at Jamnagar, will spend Rs 2,500 crore every year over the three to four years and another Rs 5,800 crore on setting up its retail base. 

In telecom, private and state-owned telecom players are lining up investments of over Rs 35,000 crore in the next three years. Market leader BSNL has earmarked an investment of over Rs 16,500 crore in 2004 alone in extending its network and cell sites. Mahanagar Telephone Nigam Ltd plans to invest Rs 2,284 crore in 2003-2004 on developing telecom infrastructure. 

Reliance Infocomm will invest another Rs 8,500 crore in upgrading and expanding its countrywide network during the current year, while Bharti Enterprises is also expected to invest close to Rs 2,000 crore. 
Hutchison Essar will put in about Rs 1,800 crore in 2004 in its circles, Idea Cellular, the three-way venture among the AV Birla, AT&T and the Tata group, has budgeted Rs 600 crore in 2003-2004 for its five circles and BPL Mobile Cellular is investing another Rs 500 crore. 

The steel industry, currently in a turnaround mode, has earmarked investments of Rs 3,700 crore so far for brownfield expansions. While Tata Steel is slated to invest about Rs 1,700 crore in the upcoming additional capacity of 1 million tonne at Jamshedpur, the steel giant is also open to hiking capacity by another million tonne in the next three years. 

Steel Authority of India plans an expenditure outlay of Rs 600-800 crore every year on technical upgradation and operational upgradation. Ispat Industries has announced a capital expenditure of Rs 890 crore spread over the next two years. The company is targeting a capacity increase of 1.2 million tonne to a totalled installed capacity of 3.6 million tonne, along with investments focusing on backward integration. 

Leading the pack in the metals sector is the Sterlite group which has announced a capital expenditure of $2 billion in the next two to three years. This includes a Rs 4,000 crore greenfield alumina project in Orissa, a Rs 5,000 crore expansion for Bharat Aluminium Corporation and another Rs 1,600 crore for Hindustan Zinc. The state-owned National Aluminium Company has lined up a Rs 3,000 crore investment, while Hindustan Aluminium Company is still finalising an expansion of copper and aluminium facilities. 

In the power sector, Tata Power Company and Reliance Energy are both planning to cash in on the opportunities presented by the new Electricity Act, 2003. Tata Power has chalked out an expansion plan of 1,500 mw in the next five years, which could cost the company up to Rs 6,000 crore. Reliance Energy has announced the setting up of a 3,000 mw plant using the gas from its Krishna-Godavari basin, with an investment of between Rs 9,000-10,000 crore.

In the pharmaceuticals industry, companies like Ranbaxy, Nicholas Piramal and Wockhardt, which have embarked on an inorganic growth strategy to acquire globally competitive size and penetrate the developed markets, are making international acquisitions. Ranbaxy recently announced the acquisition of the French RPG Aventis for a consideration of around $70 million, Wockhardt acquired UK-based CP Pharmaceuticals for around 10 million pounds and Zydus Cadilla acquired French company Al-Pharma for around $5 million. 

The auto industry is on a roll. TVS Motors will invest nearly Rs 1000 crore over the next five years. Hyundai Motors is well on its way to invest $ 225-250 million to push up the capacity from 1.4 lakh units to 2.5 lakh units by August 2004. Bajaj Tempo’s foray into H&MCV markets with the German truck and diesel technology major MAN will cost them Rs 250-350 crore over the next three years. Plans include setting up two greenfield plants at different locations and one extra factory building next to its Pithampur plant.

Indian auto ancillaries have finally arrived on the global market. Bharat Forge has plans to raise around Rs 350 crore which will be utilised to pay off the CDP acquisition and make other capex investments to establish themselves as serious players in the passenger car market. Besides Bharat Forge, other auto ancillary biggies like Amtek, Sundaram Clayton, Motherson Sumi, etc. will make investments to set base in China either through acquisitions or fresh investments. In sum, it’s investment – and growth – time, at last.