Capital goods and engineering players are a disappointed lot as Reserve Bank of India (RBI) maintains key rates unchanged bringing a set back to the profit margins of the companies. Several players have decided to curtail their operations by about 10 to 20 per cent from this month onwards to reduce their working capital requirement.
At its quarterly monetary policy review on Monday, the central bank kept policy rates unchanged in view of rising inflation and global economic uncertainty. Also, the cash reserve ratio (CRR) or the percentage of deposits that banks have to keep with RBI has been kept unchanged at 4.75 per cent.
"There was some hope of interest burden getting reduced. But now that hope is vanished. It is getting difficult to meet the short term capital requirement at such high rates. This is a big disappointment for capital goods sector," said Hemendra C Shah, CFO of Elecon Engineering Ltd - a leading material handling equipment maker.
According to industry players, engineering products manufacturing has slowed sharply during the first quarter of the current fiscal. The industrial production data for the month of April 2012 showed that capital goods sector witnessed a contraction of 16.3 per cent during the month.
Industry sees plant utilisation to drop by 10 - 20 per cent in capital goods segment as well as in the engineering sector.
"High cost of borrowing has already started affecting the industry. There is no doubt that industry may trim their production by about 15-20 per cent as a result of the RBI announcement," said Y R Sharma, joint managing director, KHS Machinery Pvt Ltd.
The working capital cycle has started hampering balance sheets of the companies. The capital goods industry has high interest outgo of about 4-5 per cent of the total sales. This is feared to rise further amid tight interest rate situation.
"There is a dull mood in the economy. Several policy decisions are pending and amid all these, a rate cut was eagerly awaited. This will put pressure on the capacity utilisation. We are currently operating at about 50 per cent utilisation," informed a senior official of Transformers & Rectifiers (India) Ltd.
Some of the companies are also exploring alternate options for short term borrowing including commercial papers borrowings. This is believed to save about 25-50 basis points for the companies vis-a-vis bank borrowings.
Sources in the industry maintained that the order flow from the projects that have achieved financial closure is also weak. Most of the companies are likely to delay withdrawal of the orders. This has prompted several players to go for a reduction in capacity utilisation.
"The decision is a set back mainly for the those companies that have exposure in the power and automobiles industry. Expansion plans have been put on hold due to costly borrowings, this would affect the demand for new equipment," Sharma said.