Rs 32,000 cr growth push
Jan 24 2012 , Mumbai
Tags: News
CFOs say not enough to resume capex spendings
The Rs 32,000 crore liquidity infusion by the Reserve Bank of India will boost India Inc’s sentiment somewhat, but it is not enough to trigger a resumption in capex cycle, chief financial officers of leading companies told Financial Chronicle. RBI on Tuesday cut the amount of money that banks set aside from the deposits they receive by half-a-percentage point to free up liquidity in a bid to drive growth. But companies doubt if this can reverse the trend of falling capital investments to create fresh productive capacity or boost infrastructure investment. A top official at Chennai-headquartered Sundaram Fasteners told this paper that the company would review capex plans based only on ‘market conditions’. “There is a tight liquidity condition, which is forcing banks to borrow Rs1,50,000 crore under the LAF window. It is very much essential to cut policy rates to boost sentiment and revive the investment cycle,” said Seshagiri Rao, group CFO at JSW Steel.
With steel firms such as JSW Steel running below capacity due to shortage of aptly priced raw materials such as coal and iron ore, companies are reluctant to accelerate planned expansions as they may end up stranded for want of inputs.
A similar situation exists in the power sector where lack of domestic coal linkages, issues with regard to tariff for imported coal-fired power projects and poor payment ability of power distribution companies are moderating investment. Most CFOs feel the CRR cut will help ease the tight liquidity condition faced by banks potentially helping better-rated companies to get money easily.
However, sceptics in corporate India feel the CRR cut may be a ploy to help the government bridge the ballooning deficit, which will necessitate additional market borrowings.
“This step clearly shows the government is concerned about growth. But this one step alone will not result in money flow to the infrastructure sector. We will need clear-cut policy guidelines for this,” said Praveen Sood, group CFO at Hindustan Construction, whose biggest project in Lavasa is stuck for want of environment clearances.
Officials at the $35 billion AV Birla group felt the CRR cut would help improve banks’ bottom lines, boost their lendable resources and allow them to earn more profit. “The CRR cut is more of a directional pointer to interest rates. Two or three such cuts will help revive sentiment,” said the CFO of one of the Kumar Mangalam Birla-led flagships.
“The regulator has finally acknowledged that growth is also important and it’s not just inflation that tops its agenda. As it takes steps to support growth, I believe interest rates too will fall,” said Adesh Gupta, director at Grasim Industries.
“Banks are choosy about who they lend to. Companies too are careful about borrowing at these rates. Companies will wait for the results of assembly elections before they take decisions on long-tailed, capex-intensive projects,” said Surendra Goyal, chief financial officer at Birla Carbon, a part of the AV Birla group.
“This is the best RBI could have done in the current scenario, as accessing funds itself was becoming an issue,” said the CFO of another AV Birla firm.
“The macro picture is pretty grim at the moment and we are having a tough time with liquidity. Getting sentiment up is very important now as we have fallen back to the Hindu level of growth. We need a major stimulus to awaken from the deep slumber as industry is living on hope like a cancer patient. A reduction of interest rates might help rid the fear psychosis,” said S Venkataraman, chief strategy officer at Apollo Hospitals group.
P Ganesh, executive vice-president & company secretary at Godrej Consumer Products (GCPL), said: “Interest rates are expected to soften as RBI has signalled a clear shift to a soft money policy, which is an appropriate response to slowing economic growth and credit growth. Capex spending is unlikely to pick up in a hurry and it will be determined by how the economic uncertainty pans out.”
The RBI move is perhaps the first concrete step by the central bank to take cognisance of falling growth. “From a sentiment perspective, this is good but interest rates are quite high,” said Mahadev Iyer, CFO for steel business at Essar group.
Seconds Umang Vohra, CFO at Dr Reddy’s Laboratories, “We must now deal with restoring confidence in the investment process. This means lower interest rates and more facilitative governance through legislation like GST, DTC and other reforms. The second is aiding growth through various legislations such as the land acquisition bill, and decisions around FDI in various sectors of the economy.”
Tata Realty and Infrastructure CEO Sanjay Ubale said: “We were expecting interest rates to come down in this quarter itself, but now we expect the rates to come down from next quarter onwards.”
“This is a positive for the infrastructure industry as it indicates that RBI is also concerned about the non-availability and high cost of funds. At this point, interest rates may be balanced. This will help us syndicate funds available for existing and new projects,” said KG Naidu, vice-president of finance at Gayatri Projects.
Sanjeev Bafna, group CFO at the Siva group, controlled by maverick investor C Sivasa-nkaran, pointed out that lack of investment spending in fresh capacity creation by India Inc is not a function of monetary policy. “Low business confidence has sapped investment. At the same time banks are not lending due to high-risk perception. To add to it, high interest costs have hit profitability of companies,” Bafna said.
“We do not see any increase in capex spending as a result of the credit policy as interest rates and inflationary trends remain high and global markets are not buoyant enough to encourage investment or expansion,” said A Shakthivel, chairman at Apparel Export Promotion Council.
Companies are waiting for interest rates to fall so as to boost the projected internal rate of return on fresh projects before they contract long tenure loans. “Our long-term loans are due for reset in next September, by which time we expect interest rates to fall,” said AV Dharmakrishnan, executive director of finance at Madras Cements.
Hemant Kanoria, managing director at Srei Infrastructure Finance, said the situation would improve once the repo rate is reduced, as that will improve the cost of projects and generate interest of companies to renew the capex investment cycle. However, the CRR cut may reduce cost of fund for short-term borrowings such as those done through commercial papers, which are used to fund day-to-day operations of companies.
Thus, while it may not encourage large capex investments, it could increase profitability of ongoing operations by way of reduced interest cost.
“Short-term interest rates may go down. Commercial paper rates may fall by 25-50 basis points despite the high demand for short-term debt,” said Shailesh Sawa, director for finance at Essar Ports.
“The CRR cut will impact interest rates for the short term. I expect 25-30 basis points reduction in interest rates on commercial papers. Generally speaking, companies feel interest rates will soften in the future,” said KV Srinivasan, CEO at Reliance Commercial Finance.
“After the negative impact created by 13 continuous rate hikes, this tokenism will prove insufficient to boost growth. Consumption of funds by the government sector has left private investment short of liquidity. Over the past one-and-a-half year, investments have shifted drastically towards the public sector, which has impacted private players very badly. Hopefully, the Union budget will correct the aberration and help RBI ease monetary policy. Only then growth will receive the relevant support,” said Pradeep Jain, chairman of Parsvnath Developers and also chairman of the Confederation of Real Estate Developers’ Association of India (Credai).
It’s not just the realty sector, which seems starved of funds. The scam-hit telecom sector, too, has the Cellular Operators Association of India (COAI) clamouring for ‘adequate funding’ from banks.
“There has been some sluggishness on that front. Telecom firms requiring funding should get their due from the Rs 32,000 crore liquidity that is being released by this CRR cut,” said Rajan S Mathews, director general at COAI.
Sunil Goel, senior vice-president for finance at Samsung India, said: “We expect the CRR cut to lead to a cut in short-term interest rates. If the CRR rate cut is followed by a repo rate cut, we expect it to boost capex spending.”
(With inputs from Vikas Srivastav, Meghna Maiti and Jharna Mazumdar in Mumbai, Kumar Shankar Roy in New Delhi, D Govardan, G Balachandar in Chennai, Ritwik Mukherjee in Kolkata, Trushna Udgirkar in Hyderabad, C Shivkumar and Sameer Ranjan Bakshi in Bangalore)
With steel firms such as JSW Steel running below capacity due to shortage of aptly priced raw materials such as coal and iron ore, companies are reluctant to accelerate planned expansions as they may end up stranded for want of inputs.
A similar situation exists in the power sector where lack of domestic coal linkages, issues with regard to tariff for imported coal-fired power projects and poor payment ability of power distribution companies are moderating investment. Most CFOs feel the CRR cut will help ease the tight liquidity condition faced by banks potentially helping better-rated companies to get money easily.
However, sceptics in corporate India feel the CRR cut may be a ploy to help the government bridge the ballooning deficit, which will necessitate additional market borrowings.
“This step clearly shows the government is concerned about growth. But this one step alone will not result in money flow to the infrastructure sector. We will need clear-cut policy guidelines for this,” said Praveen Sood, group CFO at Hindustan Construction, whose biggest project in Lavasa is stuck for want of environment clearances.
Officials at the $35 billion AV Birla group felt the CRR cut would help improve banks’ bottom lines, boost their lendable resources and allow them to earn more profit. “The CRR cut is more of a directional pointer to interest rates. Two or three such cuts will help revive sentiment,” said the CFO of one of the Kumar Mangalam Birla-led flagships.
“The regulator has finally acknowledged that growth is also important and it’s not just inflation that tops its agenda. As it takes steps to support growth, I believe interest rates too will fall,” said Adesh Gupta, director at Grasim Industries.
“Banks are choosy about who they lend to. Companies too are careful about borrowing at these rates. Companies will wait for the results of assembly elections before they take decisions on long-tailed, capex-intensive projects,” said Surendra Goyal, chief financial officer at Birla Carbon, a part of the AV Birla group.
“This is the best RBI could have done in the current scenario, as accessing funds itself was becoming an issue,” said the CFO of another AV Birla firm.
“The macro picture is pretty grim at the moment and we are having a tough time with liquidity. Getting sentiment up is very important now as we have fallen back to the Hindu level of growth. We need a major stimulus to awaken from the deep slumber as industry is living on hope like a cancer patient. A reduction of interest rates might help rid the fear psychosis,” said S Venkataraman, chief strategy officer at Apollo Hospitals group.
P Ganesh, executive vice-president & company secretary at Godrej Consumer Products (GCPL), said: “Interest rates are expected to soften as RBI has signalled a clear shift to a soft money policy, which is an appropriate response to slowing economic growth and credit growth. Capex spending is unlikely to pick up in a hurry and it will be determined by how the economic uncertainty pans out.”
The RBI move is perhaps the first concrete step by the central bank to take cognisance of falling growth. “From a sentiment perspective, this is good but interest rates are quite high,” said Mahadev Iyer, CFO for steel business at Essar group.
Seconds Umang Vohra, CFO at Dr Reddy’s Laboratories, “We must now deal with restoring confidence in the investment process. This means lower interest rates and more facilitative governance through legislation like GST, DTC and other reforms. The second is aiding growth through various legislations such as the land acquisition bill, and decisions around FDI in various sectors of the economy.”
Tata Realty and Infrastructure CEO Sanjay Ubale said: “We were expecting interest rates to come down in this quarter itself, but now we expect the rates to come down from next quarter onwards.”
“This is a positive for the infrastructure industry as it indicates that RBI is also concerned about the non-availability and high cost of funds. At this point, interest rates may be balanced. This will help us syndicate funds available for existing and new projects,” said KG Naidu, vice-president of finance at Gayatri Projects.
Sanjeev Bafna, group CFO at the Siva group, controlled by maverick investor C Sivasa-nkaran, pointed out that lack of investment spending in fresh capacity creation by India Inc is not a function of monetary policy. “Low business confidence has sapped investment. At the same time banks are not lending due to high-risk perception. To add to it, high interest costs have hit profitability of companies,” Bafna said.
“We do not see any increase in capex spending as a result of the credit policy as interest rates and inflationary trends remain high and global markets are not buoyant enough to encourage investment or expansion,” said A Shakthivel, chairman at Apparel Export Promotion Council.
Companies are waiting for interest rates to fall so as to boost the projected internal rate of return on fresh projects before they contract long tenure loans. “Our long-term loans are due for reset in next September, by which time we expect interest rates to fall,” said AV Dharmakrishnan, executive director of finance at Madras Cements.
Hemant Kanoria, managing director at Srei Infrastructure Finance, said the situation would improve once the repo rate is reduced, as that will improve the cost of projects and generate interest of companies to renew the capex investment cycle. However, the CRR cut may reduce cost of fund for short-term borrowings such as those done through commercial papers, which are used to fund day-to-day operations of companies.
Thus, while it may not encourage large capex investments, it could increase profitability of ongoing operations by way of reduced interest cost.
“Short-term interest rates may go down. Commercial paper rates may fall by 25-50 basis points despite the high demand for short-term debt,” said Shailesh Sawa, director for finance at Essar Ports.
“The CRR cut will impact interest rates for the short term. I expect 25-30 basis points reduction in interest rates on commercial papers. Generally speaking, companies feel interest rates will soften in the future,” said KV Srinivasan, CEO at Reliance Commercial Finance.
“After the negative impact created by 13 continuous rate hikes, this tokenism will prove insufficient to boost growth. Consumption of funds by the government sector has left private investment short of liquidity. Over the past one-and-a-half year, investments have shifted drastically towards the public sector, which has impacted private players very badly. Hopefully, the Union budget will correct the aberration and help RBI ease monetary policy. Only then growth will receive the relevant support,” said Pradeep Jain, chairman of Parsvnath Developers and also chairman of the Confederation of Real Estate Developers’ Association of India (Credai).
It’s not just the realty sector, which seems starved of funds. The scam-hit telecom sector, too, has the Cellular Operators Association of India (COAI) clamouring for ‘adequate funding’ from banks.
“There has been some sluggishness on that front. Telecom firms requiring funding should get their due from the Rs 32,000 crore liquidity that is being released by this CRR cut,” said Rajan S Mathews, director general at COAI.
Sunil Goel, senior vice-president for finance at Samsung India, said: “We expect the CRR cut to lead to a cut in short-term interest rates. If the CRR rate cut is followed by a repo rate cut, we expect it to boost capex spending.”
(With inputs from Vikas Srivastav, Meghna Maiti and Jharna Mazumdar in Mumbai, Kumar Shankar Roy in New Delhi, D Govardan, G Balachandar in Chennai, Ritwik Mukherjee in Kolkata, Trushna Udgirkar in Hyderabad, C Shivkumar and Sameer Ranjan Bakshi in Bangalore)
0 commentsPost your Comment
RELATED VIDEO
Jan 26, 2012
Dec 30, 2011
Dec 09, 2011
Nov 30, 2011
Nov 23, 2011
FC SUPPLEMENTS
FC NEWSLETTER
Stay informed on our latest news!
- Cash infusion in Air India can only be a losing propositionFor a government that prides itself on fiscal accountability, making a commitment to invest Rs 19,911 crore in Air India can best be termed as absolut
Financial Chronicle on Facebook
INTERVIEWS
GV Nageswara Rao
Timothy Moe
Chander Mohan Sethi
COLUMNIST
Post new comment