India Ratings & Research (Ind-Ra) believes that the recent excise duty cut to 10% from 12% on capital goods falling under chapter 84 and 85 of the Central Excise Act will not materially affect the industry at least in 1HFY15.

To the extent, the economy-wide capex rate and project execution have slowed significantly, a nominal cut, even if it is passed on to customers, is unlikely to boost demand for such industrial goods. Thus, arguably capital goods producers may decide not to pass on the full benefit so as to give a modicum of cushion to their falling margins.

Demand for capital goods is driven by government-related infrastructure activity or corporate capex. The capex level in BSE 500 corporates fell in FY13 and is estimated at around 54% of the FY12 levels only. Debt levels continued to increase in FY13, although at lower levels than in FY12. FY14 capex is estimated to be even more muted and could aid the liquidity profile of corporates in these stressful times. This is subject to FY14 operating performance being at par with the FY13 levels.

The agency has maintained a negative outlook on the infrastructure sector for 2014 and believes that the expectation of a quick turnaround in the sector is misplaced. As such, the gross fixed capital formation (GFCF) growth rate is showing a low single digit to outright negative yoy growth rate for the last nine quarters. This is undoubtedly the weakest stretch of GCFC growth rate in the last 15 years.