FCF subtracts all capex, so it punishes the builder and flatters the harvester. Yet the two kinds of capex are economically opposite. Maintenance capex is the cost of standing still: replacing worn machines, refreshing stores, keeping the plant certified. It's a true, unavoidable expense of current earnings. Growth capex is an investment decision. New stores and new capacity are the usual examples. That money could have gone to owners and was reinvested instead, so you judge it on its ROIIC.
A company that spends ₹500 crore of which ₹100 crore is maintenance is far more valuable than one spending ₹500 crore of which ₹450 crore is maintenance, at identical FCF.
No statement discloses the split. A few managements volunteer it, and you should trust but verify. So analysts estimate it three ways and triangulate.
How do you estimate maintenance capex?
Method 1: the depreciation proxy. Maintenance capex ≈ depreciation. The logic is that depreciation is the accountants' estimate of the capital consumed this period, and replacing what was consumed is maintenance. It's fast and always available, and its biases run in directions you can predict. It understates maintenance when inflation pushes replacement cost above historic cost. A machine bought for ₹100 depreciates ₹10/year, but replacing a tenth of it costs ₹13 at today's prices. In India's inflation environment, lift the proxy by ~10 to 25%. It overstates maintenance for a young asset base still far from replacement, and it imports whatever games management plays with depreciation lives. One refinement: use depreciation only, excluding amortization of acquired intangibles. Amortizing a customer list picked up in an M&A deal creates no replacement obligation.
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Method 2: Greenwald's sales-linked method, from Value Investing: From Graham to Buffett and Beyond. The premise is that PP&E supports sales in a roughly stable ratio. Capex attributable to sales growth is growth capex, and the rest maintained the base.
- Compute gross PP&E ÷ sales for each of the last five years; average the ratio.
- Growth capex this year = that ratio × this year's increase in sales.
- Maintenance capex = total capex − growth capex.
Worked Example 1 runs the full table. The method holds only under a few conditions. The PP&E-to-sales relationship must actually be stable, and it breaks for companies changing business mix or capital intensity. Sales growth should be volume-led, because pure price inflation fakes "growth" that needed no assets. And in a year of falling sales the method returns maintenance = total capex, which makes sense, since nothing was built.
Can disclosure or unit economics show maintenance capex?
Method 3: disclosure and unit economics. Some managements state maintenance capex. Miners do it often. So do hotels and telcos, so read the capex note and the earnings-call Q&A. Where units are countable, build it yourself. A retailer with 400 stores refreshing each one every 8 years at ₹2 crore has maintenance capex ≈ 400/8 × 2 = ₹100 crore. Whatever it spent beyond that opened new stores.
Triangulate and quote a range. When the three methods disagree wildly, the disagreement is information. It usually points to depreciation-life games or a shift in business mix. It goes in your notes. Don't bin it.