Rate cut to benefit mid-caps

Interest rate sensitives are the obvious choice; smaller players with operational turnaround to see accelerated gains

The Reserve Bank of India's cut in the policy repo rate by 25 basis points to 6.25 per cent has come as a welcome sign for the markets. While interest sensitives get a boost, the benefit will also flow to manufacturing and services-oriented companies as lower cost of debt and interest outgo. The latest cut is not to be looked at in isolation, and since benefits are still to flow from earlier cuts, companies and investors can expect more gains ahead.

P Phani Sekhar, fund manager, Portfolio Management Services, Karvy Stock Broking, says only about 55-60 per cent benefits of earlier cuts (100 basis points since June 2015) have flown till now. Thus, corporates can see more benefits than the 0.25 per cent announced on Tuesday.

While rate sensitives like non-banking finance companies (NBFCs), banks and auto are obvious gainers, companies in other industries, too, are beneficiaries.

Ajay Bodke, CEO & chief portfolio manager at Prabhudas Lilladher, says the bigger (and immediate) gainers will be corporates that have strong credit ratings and access to non-banking channels, like wholesale money markets, which see immediate transmission of the drop in repo rates. NBFCs and banks have also benefited (from the declining rate cycle).

However, investors need to be careful while picking beneficiaries, as the degree of gains will vary. "Not everyone can access the bond market because of the constraints with respect to credit ratings, lenders' comfort, etc. Not that companies dependent on the banking sector will not gain, but they will gain at the margin. The real kicker will come if smaller companies are able to improve their credit score and source funds from non-banking channels," adds Bodke.

Experts say there are many companies, apart from frontline index firms, that have started doing well operationally, and can get a further boost on profitability from lower interest outgo. The run up in stock prices of Kesoram Industries, GHCL, Radico Khaitan, Ashoka Buildcon, etc, proves this. Firms where debt levels are significantly high and operational performance not at desired levels should be avoided, say pundits.

Companies where the business cycle is turning favourable can see accelerated gains. Players in oil and oil derivatives are already benefitting from lower crude prices, points out G Chokkalingam at Equinomics Research and Advisory. Similarly, industries will benefit from rural demand improvement after a good monsoon, and metals and mineral players that are seeing positive turnaround with lower input costs and rebounding base metal prices. So, players in these industries who will now see cost of borrowing come down may benefit, says Chokkalingam.

Lower interest costs in the coming months will also increase business for finance-linked consumption companies. Sekhar feels banking and consumer finance will benefit, with Diwali around the corner and customer spending likely to increase. However, he says banks provide some relief large borrowers that are on the margin of turning to bad, apart from passing benefits of lower interest rates to existing portfolio of customers.

Mid and small-cap companies in chemicals and oil and gas space like Sudarshan Chemicals and IG Petrochemicals are also seeing improvement in operational parameters besides declining interest expenses. Lower financial costs will only add to their gains.

Sahil Kapoor at Edelweiss says companies in the consumption basket that have not done well in past 9-12 months may start doing better. Amongst financials, he says GIC Housing Finance and Tourism Finance are the brokerage's choice, while heavy asset owners or capex intensive industries should see gains. AMC Projects looks interesting while the brokerage is also looking at opportunities in transformer manufacturers segment.

Sandeep Upadhyay, MD and CEO Centrum Infrastructure Advisory, also believes asset owners will gain going ahead. "Any interest rate cut will be positive for most infrastructure players. If the banks cut rate by 0.5-0.75 per cent, the equity IRR (internal rate of return) for companies like GVK Power will increase by 0.5-1.0 per cent." The benefits will accrue more to asset-owning companies as they borrow for longer term, while EPC companies will also gain. Upadhyay says GMR Infra, IL&FS Transportation, IRB Infra will benefit in a big way.