Corporate India braces for lower growth, tighter liquidity

As companies step into the new year, they realise that they may have to live with lower growth and costlier money as 2010 could be more challenging than 2009.

That’s because companies expect the macroeconomic environment to get tougher. Stimulus measures, which fuelled demand, are likely to be withdrawn in the Budget for 2010-11, while a tighter monetary policy could drain liquidity.

“2010 will be a more challenging year than 2009 for companies. We have to factor in higher interest rates and tighter liquidity while making our plans. Growth will more challenging,”' says JSW Steel Deputy MD Seshagiri Rao.

A tighter monetary policy means higher interest rates and tougher liquidity conditions. Rao thinks bank liquidity could start getting drained out from April 2010 onwards.

As an indication, the yield curve is steepening (the differential in yields between a two-year and three-year government securities, or G-Sec, are increasing). The interest rates on a 10-year G-Sec has already inched up to 7.7 per cent from 7.1 per cent.

Given the fiscal situation, chief financial officers (CFOs) believe the United Progressive Alliance government has no choice but to withdraw the stimulus measures (raise excise duties). Higher excise will increase prices of goods and hurt demand. Take the steel industry, for instance.

Till September 2009, the industry was growing at 9-10 per cent, whereas between October and December, the growth turned negative. After the stimulus measures were announced, it has been growing at 6.5-7 per cent now. Experts feel a hike in excise duty could shave off 1-2 per cent of this growth.

Ravi Nedungadi, president and CFO, UB Group, says: “2010 will definitely see inflation rear its head everywhere. In the last decade, the world had got used to growth without inflation. It’s going to be a major adjustment. Higher interest costs could impact infrastructure spending in India.”

“Governments across the world will introduce more regulation. Cost of compliance will be high. Trade barriers in the Western world will bring its own pressures,” said Nedungadi. He also believes that the rupee may rise against Western currencies, especially the US dollar, which will hurt exports.

Besides qualified institutional placements (QIPs), companies have been raising money through mutual funds and state-run insurer Life Insurance Corporation of India. A new rule bars funds from lending money for less than a 90-day tenure. “Banks were parking their liquid funds with mutual funds, a bulk of which will go back to the banking system if the Reserve Bank of India raises the cash reserve ratio or the statutory liquidity ratio. When the real demand comes back next year, there will be constraint for liquidity and growth,” said Rao.

Companies will have to factor in higher interest rates and tighter liquidity conditions in their plans. Virendra Mhaiskar, CEO, IRB Infrastructure, however, feels that there is no case for raising interest rates as credit offtake remains poor. In fact, IRB managed to bring down interest rates by 200 basis points on loans worth Rs 1,000 crore. ‘‘If credit quality is good, and repayment in punctual, banks are willing to lower rates,’’ he said.

Andrew Holland, CEO (institutional equities), Ambit Capital, said: “Appetite for corporate paper may diminish and companies’ fund-raising plans may be impacted.”

What’s worrying entrepreneurs and companies, however, is the weak primary market. There may have been a flurry of initial public offerings (IPOs), especially from the power sector, but there’s very little participation from retail investors while the level of oversubscription by qualified institutional bodies (QIBs) have come down from 10-20 times to 3-5 times.

In many cases, the retail portion remained unsubscribed and was added to QIB portion (like in case of JSW Energy, where only 45 per cent of the retail portion got subscribed), while in some other cases like Godrej Properties (a much smaller, Rs 500-crore IPO), the retail portion just got subscribed. Clearly, 2010 can be more challenging than 2009.