Tight liquidity will hit over-leveraged and cash-hungry companies, spare conservative ones
State Bank of India Chairman Pratip Chaudhuri might be confident that lending rates would not increase despite the central bank’s liquidity-tightening measures, but corporate India is hardly convinced.
India Inc says Wednesday’s measures, which came barely a week after similar tightening steps on July 15, have sent a clear signal that RBI is willing to live with higher rates, as it sees the rupee’s stability as priority. As a result, the last hope of an early turnaround in the capex cycle and economic growth rate has been dashed.
“The latest move is contrary to the industry expectations and will adversely affect capacity creation and hurt economic growth. It seems growth can wait as far as the the central bank is concerned,” says Thermax India MD M S Unnikrishnan. The move, he says, will add further pressure on his customers and worsen the outlook for capital goods companies, which will now be forced to either cancel or delay growth plans in response to rising and increasingly scarce credit.
The view is similar at Essar Group, which has interest in steel, oil & gas, ports, shipping, power and BPOs. “Borrowing in rupee will become prohibitively expensive and unviable for firms. More companies will opt for dollar borrowing but that might also become difficult due to the country risk India is carrying today,” says Prabal Banerjee, president (international finance) Essar Services India.
“RBI has reasons to do so, but since this has been done with the aim to suck up liquidity from the system, it will have a cascading effect on interest rates. That’s a negative for industry,” says Issac George, chief financial officer at infra firm GVK Power & Infrastructure.
Others argue for a distinction between large companies and small and medium firms while analysing the impact of monetary tightening by the central bank. “RBI’s latest move will only have a small direct impact on large companies and those belonging to large reputed groups. But their downstream customers or vendors may now find it tough to borrow at competitive rates due to depressing demand,” says K K Maheshwari, managing director of Grasim Industries, the flagship company of Aditya Birla Group.
He ruled out any change in Grasim’s growth plans, given that the company is debt-free and sitting on spare cash.
As liquidity dries up, CEOs expect banks to discriminate in favour of productive sectors like manufacturing to minimise the side effect of a tight monetary policy. “When credit was cheap and plentiful, a lot of capital went to speculative and non-productive assets like real estate. Now that banks have less capital to lend, they are likely to discriminate between good and bad borrowers and set the stage for the next round of economic recovery,” says Maheshwari.
Experts agree. “Monetary tightening and hike in interest rates are integral part of India’s macro-economic adjustment process. Interest rates had turned negative-adjusted for inflation, making India an unattractive investment destination. RBI is now trying to reverse the situation so that India once again becomes attractive for foreign investors,” says Deep Narayan Mukherjee, director (ratings), India Ratings & Research. The central bank had to choose between a long-term damage to the India growth story and short-term pain to correct various macroeconomic imbalances. It chose the latter, he says.
India Ratings says the move will mostly hit companies with leveraged balance sheets and poor operational and financial metrics. “The cash generation ability of BSE 500 companies and their debt servicing ability as measured by net leverage and coverage measures is at its lowest since 2008. In FY13, at least 64 per cent of BSE 500 companies showed deterioration in their fund flow from operations,” wrote Mukherjee in a recent report on the balance sheet strength of India’s top companies. With such high debt levels, he says, most companies have limited ability to make fresh borrowings without impairing their credit metrics.
The pain is likely to be most severe in the sectors like shipping, fertilisers, chemicals, metals, construction & infra, real estate and retail, where firms are either over-leveraged or experiencing longer working capital cycle and, thus, have poor fund flow from operations, despite reporting profits. In contrast, sectors like cement (large integrated players), FMCG, pharma and IT services are likely to be least affected.
This might explain why well-funded companies and those with no cash flow problems are not losing sleep about RBI’s latest move. “We don’t require borrowings to fund our operations in India and all our dealers have more than enough working capital limits with their respective banks. Unless any of them wants to grow too aggressively, I don’t foresee any issue from the recent RBI moves,” says Havells India President Sunil Sikka.
Bangalore-based real estate player Sobha Developers shares the view, but says things could change if banks start revising their base rates upwards. “So far, there has been no material impact on our operations due to the recent RBI moves but demand might be affected if banks decide to raise their base rates,” says Sobha Developers Chief Financial Officer Ganesh Venkataraman.
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