 "A good start but some more positives needed: Phillip L Lotter")
Although global rating agency Moody's was optimistic on Indian economy, it called for a stable tax regime and further relaxation in rules relating to investments. Moody's MD (corporate finance) Philipp L Lotter spoke to Sanjay Jog and Abhijit Lele on the expectations of investors from the government. Edited excerpts:
The Narendra Modi government is completing one year in office. Your assessment?
We have never been in the business of sentiments, which is nice. We can focus on hard facts and reality. We are probably always a little downbeat when the markets are positive and are upbeat when they are particularly negative.
Personally, I feel, the new government has been incredibly successful. There have been big reforms like diesel price deregulation, which along with lower crude oil prices have brought down the underrecoveries. That’s a huge relief on the fiscal situation and oil marketing companies. Second, some of the mining reforms and social reforms around subsidies through bank accounts.
This has translated into positive sentiment. However, it is very dangerous to have unrealistic expectations. The land acquisition Bill and GST reforms are contentious issues; they cannot be executed overnight. As long as reform agenda does not paralyse, which I don’t think has happened, what we see at this stage is natural and normal as long as it does not paralyse over the longer term. We are very positive about the outlook over the next 12 to 18 months.
Companies feel the achche din they were looking for hasn’t arrived. Do you think uncertainty and taxation issues are roadblocks in implementation?
These issues will take time. A lot of reasons for some of the projects had slowed is also to do with the stability. I think the coal auction was a huge step in the right direction. There were issues regarding the gas price. Ultimately, these things will be addressed, leading to clearances coming through. But these things do take time.
By the way, when we speak to corporates, we don’t sense unhappiness. We see a continued sense of optimism and positivity but at the same time, a lot of companies want to wait till more tangible improvements before they step up investments.
On the coal auctions you referred to, there is a widespread belief that people have bid aggressively which might create difficulties for them in future. Your assessment?
There is an element of that (aggressive bidding). We have seen the same trend in the telecom spectrum auction process. Ultimately, it will depend on how markets will respond subsequently. It is certain given the history of the stretched balance sheets of corporate India we are keeping an eye on it. I think if we see corporates leverage up without a clear path of getting clear returns from those investments then it would certainly be negative.
With a previous experience of corporates leverage, do you see Indian companies drawing a line for further borrowings?
We cannot talk about Indian corporates in general. There are many corporates who are very prudent. There are many Indian blue chip companies, which are very prudent in their borrowings. There are others who are incredibly aggressive and they have always gone through the leverage cycle.
What according to you needs to be done by the government to restart stalled projects?
There needs to be investment stability, stability around policies and streamlining of decision making and better alignment between federal and state governments. The land acquisition Bill plays a role as well. Going forward, it will affect the existing projects less and then the future projects but it is a major milestone in putting in place the more predictable environment for companies to make large-scale capital investments.
A further look at the gas prices is required. The coal auction has brought stability and ultimately broke the monopoly of Coal India.
All those things are positive but there are still lot many things that need to be addressed.
The contentious issue that you are referring to is the policy uncertainty on the taxes. How do you look at it?
There have been setbacks on the tax front. The huge tax bills that have been placed on corporates, the MAT, retrospective tax demands; they were the huge setbacks. This is exactly the kind of the instability and unpredictability that has affected the foreign direct investment and affected the confidence in investments in India. So, it is a matter of priority.
What is Moody's projection of India's economic growth prospects?
We are looking at a growth between 7 and 8 per cent this year and pick up next year probably will be closer to 8 in 2016-17. That still makes India a fastest growing economy among G-20 countries. There may be upside to that as a lot will depend on policy execution.
There is a sense that growth rate might be higher but that might not necessarily translate into pickup in demand for credit. Are there certain challenges there?
It depends on the extent to which RBI continues with monetary easing and the extent to which banks passed it onto customers. There has been reluctance on the part of banks to pass on the benefits. Therefore, the transmission effect has been relatively minor. Ultimately there will be an upside.
You spoke about the leverage. Have Indian corporates made any efforts to get their house in order other than just debt management?
There are certain superb Indian corporates, who already have their house in order and there are others particularly first and second generation promoter driven companies that have over leveraged themselves and that needs to come down. All the trends that we are witnessing in big corporates are the focus on capital management, asset liability management, streamlining debt and ultimately bringing that down. We have seen this in case of Vedanta, Essar and Tatas.
In the last 10 years, many corporate houses had taken debt in pursuit of making overseas acquisition. Going forward, we will see more prudent financial management and more focus on business in India. We are going to see greater focus on capital investments in India as against overseas.
Moody's has mentioned that they would like to expand the coverage of corporates more in India. What are the steps you are taking for it and what are the targets?
In India, we have 25 publicly rated corporates and couple of others whom we rate on ongoing basis, but ratings are private. In China, we have 181 rated corporates so there is no reason why should we have that gap. The funding requirements here are just as significant, if not more, as they are in China.
Ultimately, India needs to open itself up to foreign capital flows more so than it has done in past. I think it would be positive if some of the restrictions on external borrowings are relaxed to allow more companies to tap foreign currency markets. It will address many funding requirements the companies have. It will also address some of the stress in the Indian banking system and ultimately lead to deeper and broader capital markets. Investors are interested in Indian paper. At present, there is very little diversity of Indian paper available in the market.
Recently, RBI announced intent to allow Indian corporates to issue rupee denominated paper overseas. Are Indian corporates prepared enough that their paper will find interest among overseas investors?
I think it will take time to evolve. Investors do not have experience and track record with such investments. The demand for dollar-denominated paper is greater.
The Narendra Modi government is completing one year in office. Your assessment?
We have never been in the business of sentiments, which is nice. We can focus on hard facts and reality. We are probably always a little downbeat when the markets are positive and are upbeat when they are particularly negative.
Personally, I feel, the new government has been incredibly successful. There have been big reforms like diesel price deregulation, which along with lower crude oil prices have brought down the underrecoveries. That’s a huge relief on the fiscal situation and oil marketing companies. Second, some of the mining reforms and social reforms around subsidies through bank accounts.
This has translated into positive sentiment. However, it is very dangerous to have unrealistic expectations. The land acquisition Bill and GST reforms are contentious issues; they cannot be executed overnight. As long as reform agenda does not paralyse, which I don’t think has happened, what we see at this stage is natural and normal as long as it does not paralyse over the longer term. We are very positive about the outlook over the next 12 to 18 months.
Companies feel the achche din they were looking for hasn’t arrived. Do you think uncertainty and taxation issues are roadblocks in implementation?
These issues will take time. A lot of reasons for some of the projects had slowed is also to do with the stability. I think the coal auction was a huge step in the right direction. There were issues regarding the gas price. Ultimately, these things will be addressed, leading to clearances coming through. But these things do take time.
By the way, when we speak to corporates, we don’t sense unhappiness. We see a continued sense of optimism and positivity but at the same time, a lot of companies want to wait till more tangible improvements before they step up investments.
On the coal auctions you referred to, there is a widespread belief that people have bid aggressively which might create difficulties for them in future. Your assessment?
There is an element of that (aggressive bidding). We have seen the same trend in the telecom spectrum auction process. Ultimately, it will depend on how markets will respond subsequently. It is certain given the history of the stretched balance sheets of corporate India we are keeping an eye on it. I think if we see corporates leverage up without a clear path of getting clear returns from those investments then it would certainly be negative.
With a previous experience of corporates leverage, do you see Indian companies drawing a line for further borrowings?
We cannot talk about Indian corporates in general. There are many corporates who are very prudent. There are many Indian blue chip companies, which are very prudent in their borrowings. There are others who are incredibly aggressive and they have always gone through the leverage cycle.
What according to you needs to be done by the government to restart stalled projects?
There needs to be investment stability, stability around policies and streamlining of decision making and better alignment between federal and state governments. The land acquisition Bill plays a role as well. Going forward, it will affect the existing projects less and then the future projects but it is a major milestone in putting in place the more predictable environment for companies to make large-scale capital investments.
A further look at the gas prices is required. The coal auction has brought stability and ultimately broke the monopoly of Coal India.
All those things are positive but there are still lot many things that need to be addressed.
The contentious issue that you are referring to is the policy uncertainty on the taxes. How do you look at it?
There have been setbacks on the tax front. The huge tax bills that have been placed on corporates, the MAT, retrospective tax demands; they were the huge setbacks. This is exactly the kind of the instability and unpredictability that has affected the foreign direct investment and affected the confidence in investments in India. So, it is a matter of priority.
What is Moody's projection of India's economic growth prospects?
We are looking at a growth between 7 and 8 per cent this year and pick up next year probably will be closer to 8 in 2016-17. That still makes India a fastest growing economy among G-20 countries. There may be upside to that as a lot will depend on policy execution.
There is a sense that growth rate might be higher but that might not necessarily translate into pickup in demand for credit. Are there certain challenges there?
It depends on the extent to which RBI continues with monetary easing and the extent to which banks passed it onto customers. There has been reluctance on the part of banks to pass on the benefits. Therefore, the transmission effect has been relatively minor. Ultimately there will be an upside.
You spoke about the leverage. Have Indian corporates made any efforts to get their house in order other than just debt management?
There are certain superb Indian corporates, who already have their house in order and there are others particularly first and second generation promoter driven companies that have over leveraged themselves and that needs to come down. All the trends that we are witnessing in big corporates are the focus on capital management, asset liability management, streamlining debt and ultimately bringing that down. We have seen this in case of Vedanta, Essar and Tatas.
In the last 10 years, many corporate houses had taken debt in pursuit of making overseas acquisition. Going forward, we will see more prudent financial management and more focus on business in India. We are going to see greater focus on capital investments in India as against overseas.
Moody's has mentioned that they would like to expand the coverage of corporates more in India. What are the steps you are taking for it and what are the targets?
In India, we have 25 publicly rated corporates and couple of others whom we rate on ongoing basis, but ratings are private. In China, we have 181 rated corporates so there is no reason why should we have that gap. The funding requirements here are just as significant, if not more, as they are in China.
Ultimately, India needs to open itself up to foreign capital flows more so than it has done in past. I think it would be positive if some of the restrictions on external borrowings are relaxed to allow more companies to tap foreign currency markets. It will address many funding requirements the companies have. It will also address some of the stress in the Indian banking system and ultimately lead to deeper and broader capital markets. Investors are interested in Indian paper. At present, there is very little diversity of Indian paper available in the market.
Recently, RBI announced intent to allow Indian corporates to issue rupee denominated paper overseas. Are Indian corporates prepared enough that their paper will find interest among overseas investors?
I think it will take time to evolve. Investors do not have experience and track record with such investments. The demand for dollar-denominated paper is greater.