Across the country, all await further cuts in interest rates. If it does happen, the gains for India Inc are particularly stark. About a third of listed companies (excluding banking and financials) on the Bombay Stock Exchange have a debt-equity ratio of more than one and cost of interest is more than half their cumulative profit or a third of profit before interest. Meaning, a large part of the profits are used to service debt.
While the Street is hoping the Reserve Bank will cut interest rates by 25-50 basis points (bps) in its policy review on Tuesday, its expectation for the whole of calendar year 2013 is a cut of 75-100 bps. If it happens, it could mean a huge impetus for India Inc, especially for interest rate-sensitive companies, which have huge debt in their books and, as a result, high interest expenses. “Corporates with highly leveraged balance sheets, capex-intensive businesses and infrastructure companies are likely to get a boost from lower rates,” says Rajat Rajgarhia, director of research at Motilal Oswal Securities.
Many highly-leveraged companies are spending on capital expenditure and running losses due to high interest cost. A cut in the interest rate could, thus, mean huge gains for many of these. For instance, in FY12, Shree Renuka Sugars incurred interest cost of Rs 1,038 crore or 10.3 per cent of its total debt of Rs 10,078 crore. If the cost of borrowing for the company falls by 100 bps, it will theoretically save Rs 102 crore a year. Apart from savings in interest costs, analysts believe lower borrowing costs will revive projects in infrastructure and engineering, as it would make these more economically viable. Here, companies like IVRCL, Adani Power, Essar Ports, GVK, NCC, GMR and Suzlon Energy stand to gain.
Overall, analysts are estimating India Inc’s earnings to get a boost of 1-1.2 percentage points if rates are cut. “A 100-bps cut will definitely be a big boost, especially for debt-laden companies. Also, companies with high working capital will see cost come down immediately as a result of a cut in short-term rates, improving their profitability and margins,” says Tirthankar Patnaik, director and chief economist at Religare Capital Markets.
|HIGH EARNINGS SENSItiVITY TO INTEREST RATES|
|In Rs crore||PBIDT||Interest
|Shree Renuka Sugars||1,993||1,038||-31||3.7||10,078|
|Ruchi Soya Inds.||1,067||722||87||2.4||6,218|
|KSK Energy Ventures||870||539||131||2.7||11,562|
|GVK Power Infra||783||467||61||1.7||14,257|
|Hotel Leela Venture||441||316||19||4.5||4,175|
|All figures pertain to the latest audited financial year. List excludes banking and financial companies, and comprises of those with sales of more than Rs1,000 crore, market cap of Rs500 crore and interest costs exceeding Rs 50 crore, PBIDT is profit before interest, depreciation and tax
Actual savings will depend on other factors as well and might not reflect immediately, as rates will be cut in a phased manner. Economists say banks might not pass on the benefits if rates are cut by just 25 bps but a 50-bps cut will force them to pass on the gains to customers. “I think the rate cut would be front-loaded because in the second half there may not be enough room, in the light of the outlook for global commodity prices and domestic inflation,” says Sachchidanand Shukla, senior vice-president, institutional equity research, Axis Capital. Nevertheless, even if a 100-bps cut takes time to materialise, economists expect at least a 50-bps cut in the next three months, which should reflect positively in the FY14 earnings of companies.