Companies may go slow on expansion.
The Reserve Bank of India’s (RBI) move to raise CRR and repo rates and lock up more cash available with banks, may dent Corporate India’s profits and force them to cut down expansion plans, captains of the industry said today.
Companies that are not expanding their businesses, but have large borrowings will end up paying higher interest rate, further straining the balance sheet, which has already been hit by rising input costs. Large companies will have to pull up their socks for meeting the impending credit crunch. Cost-cutting will be the new mantra.
Mid- and small-size companies will have to bank on alternative options, including equity dilution, rather than depending on loans, said corporate heads.
CEOs reacted sharply against the credit policy. Venu Srinivasan, chairman and managing director of TVS Motors, said the company is planning to pull down its investment to Rs 70 crore this year against the last year’s Rs 150 crore. The challenge will be to sustain margins rather than increasing them, added the TVS head.
Rahul Bajaj, chairman of Bajaj Auto, said two-wheeler makers would see sales dropping as well as rising pressure on margins. “The policy will only impact growth and hurt industries. There is excess capacity in the two-wheeler market when the demand is low,” he added. The growth of the two-wheeler industry will be 2-3 per cent in the next two quarters as against 10 per cent in the first quarter, said Venu Srinivasan.
Most of the real estate companies have adopted a cautious approach in buying land and launching new projects in the light of tight monetary scenario. “We have scaled back some of our new projects and become cautious about making new commitments,” Ajith Mittal, the president of Indiabulls, said, adding that the developers need to factor in the hike in lending rates, which will lead to a dip in demand.
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Supporting this view, Sarang Wadhawan, the managing director of HDIL, said, “Higher lending rates and a resultant increase in equated monthly instalments will reduce new property purchases and hurt the sector.”
Property transactions in most of the Indian cities such as Mumbai and Delhi have fallen 10 to 15 per cent due to higher lending rates in the last six months, limiting cash flows of developers and their execution skills.
RBI’s efforts to reduce inflation may not have the expected impact, feel a few, including Chief Financial Officer of Larsen & Toubro Y M Deosthalee. He said inflation pressures are likely to persist in the economy and RBI’s policy measures are aimed at bringing the macro-indicators within the target levels.
“It appears the RBI remains concerned on inflation. Possibly they believe that demand has not yet slowed down enough and monetary tightening to curb aggregate demand is still necessary,” said Ajay Srinivasan, chief executive, financial services, and director, corporate strategy and business development, Aditya Birla Group.
D D Rathi, the wholetime director and chief financial officer of Grasim Industries said the rate hikes are above what industry expected. “Its entire focus is inflation, but growth is sidelined,” he added. Grasim is one of the lowest leveraged companies and it has not raised loans in the recent past.
According to Subir Raha, vice-chairman of the Hinduja Group and former chairman of ONGC, infrastructure projects including roads, bridges and plants, would be most affected by high interest rates. The slowdown in infrastructure will also affect the industrial growth of the country, he said.
Sudip Bandyopadhyay, CEO of Reliance Money, said inflation control remains the top priority of RBI. However, the GDP growth would suffer as a consequence of this tightening.”
“The conglomerates, which have not tied up for borrowings, will have to spend more, considering the high interest component. To match with this situation, they will have to cut down the cost and improve efficiency. Mid- and small-size companies will have to raise funds from other routes, including private placement of shares. Here private equity funds will find more space for growth,” said Bharat Banka, the chief executive officer of Aditya Birla Capital.