The hike’s near-term impact is insignificant, but further increases may hurt.
The RBI’s move to raise policy rates by 25 to 50 basis points (bps) on Tuesday doesn’t seem to have upset the markets. While the broader indices inched up by less than half a percentage point, stocks from rate-sensitive sectors like auto, realty and consumer goods surged far more than that. However, if some experts are to be believed, moderation in demand is expected for the companies operating in these sectors led by further rate hikes. With costs of borrowing expected to rise, companies with high debt on their books could see a rise in interest rates. The net impact on their earnings, however, would be influenced by factors like pricing power (with customers) among others. Since the RBI has raised its GDP growth forecast for 2010-11, experts believe that India Inc’s prospects continue to remain strong. Not surprisingly, the markets closed on a positive note yesterday.
Rate sensitive
Even as the RBI raised the repo (at which it lends to banks) and reverse repo (at which it takes money from banks) rates by 25 bps and 50 bps, respectively – signalling higher interest rates – stocks from rate-sensitive sectors like auto and realty rose ahead of the markets. The reason for the rise is that the markets had already factored in an increase in policy rates and it was in line with the expectations. Sachchidanand Shukla, senior vice president, Economist, Institutional Equity Research, Enam Securities, said, “There has been an overhang of interest rate hikes which had been overshadowing interest rate sensitive sectors. However, neither the quantum nor the timing of rate hikes was surprising.”
| TOP INTEREST PAYERS | ||
| In Rs crore | Interest costs * | % Chg (y-o-y) |
| Tata Steel | 1,508 | 30.9 |
| JP Associates | 1,162 | 85.4 |
| KF Airlines | 1,152 | 30.7 |
| Tata Motors | 1,104 | 63.9 |
| Jet Airways | 1,024 | 20.9 |
| Videocon Inds. | 662 | 28.0 |
| Suzlon Energy | 654 | 71.9 |
| Larsen & Toubro | 543 | 14.4 |
| Alok Inds. | 538 | 119.2 |
| Tata Power Co. | 407 | 33.0 |
| * Standalone figures for trailing 12 months List is indicative based on absolute interest outgo with increase of more than 10% Source: BS Research | ||
| AUTO, REALTY SHINE | |
| Company | % Chg |
| Bajaj Auto | 4.88 |
| Hero Honda | 2.97 |
| M&M | 3.23 |
| Tata Motors | 3.16 |
| DB Realty | 5.53 |
| DLF | 2.06 |
| Sobha Dev | 3.13 |
| Whirlpool | 2.43 |
| Blue Star | 3.13 |
| % change over previous close | |
Aneesh Srivastava, CIO, IDBI Fortis Life Insurance Company said the rise in stocks (rate-sensitives) on Tuesday is a short-term phenomenon. The reasons could be many, including the positive closing of the US markets (on Monday night) and the European markets (on Tuesday).
But, the road ahead may not be as smooth. While Chetan Majithia, head, equities, Crisil Research said, “We expect interest rates to go up further in the future. In this scenario, some impact on demand will be there in realty and auto.” Shukla believed that the expectations of rate hikes in the future will prove to be an overhang in some of these sectors.
“There is already a moderation in IIP numbers. Going forward, broadly, consumption segments will see better growth rates. But a few segments (auto and certain FMCG pockets) will see moderation in growth rates, which is already reflecting in some of the quarterly numbers.”
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Broader trend is positive
Experts believe that India Inc is also likely to feel some heat, but since the broader picture looks good, the positives far outweigh the negatives. While companies with high debt on their books are likely to feel the pinch, will it lead to higher costs of borrowings for India Inc? Experts don’t think so.
Shukla said: “The cost of borrowing has already gone up for most borrowers. While RBI has raised policy rates (by 75 bps), the cost of borrowing is already up 200 bps for customers because the repo rate is now the effective policy rate and not the reverse repo.” While he believes that liquidity is going to remain tight and hence, scarcity on money could mean a higher price, the overall hike in GDP growth estimates (up by 50 bps) and baby steps in hike rates (only 25 bps) by the RBI suggest that the broader impact on earnings is not going to be big or significant.
That growth rates are going to be better (estimated at 8.5 per cent for 2010-11 as against 8 per cent estimated in April 2010, and visibly higher than 7.4 per cent achieved in 2009-10) is in itself a positive sign for India Inc.
While banks could also see some pressure in the near-term, the long-term prospects remain good. Krishnan ASV, analyst, Ambit Capital said, “We expect deposit rates to start inching upwards before the lending rates, thus squeezing NIMs during the current quarter. However, over the entire fiscal, we expect banks’ NIMs to recover and subsequently remain stable.”
The credit growth projections of 20 per cent suggest that their topline growth will remain healthy. Banks that are seeing a decent demand pick with better asset quality would benefit. Experts suggest investors could consider ICICI Bank that has been successful in cleaning up its balance-sheet. Its efforts to improve efficiencies have been appreciated in the private banking space. Likewise, PNB and Union Bank in the PSU space could also be considered on dips.
(With contributions from Sarath Chelluri)