While the rate increase was beyond Street expectations, it would put further pressure on demand and profitability of firms in rate-sensitive segments.
The writing on the wall is clear — expect growth rates to become slower. With RBI raising the repo rate by 50 basis points (bps) to eight per cent and the allied reverse repo and margin standing facility rates to seven and nine per cent, respectively, banks will be pressed to pass on this increase in cost. This will lead to a rise in the cost of borrowing for corporate India and individuals in the coming days. One percentage point is 100 basis points.
The rise in policy rates is expected to further dampen growth in demand for goods and services, especially in rate-sensitive sectors such as realty, automobiles, capital goods, infrastructure and banking.
| DEMAND WOES | |||
| Company | Price on 26-Jul |
Change % | |
| YTD* | July 26** | ||
| AUTO | |||
| Mahindra & Mahindra | 717 | -3.6 | -4.2 |
| Tata Motors | 973 | -23.1 | -3.1 |
| Bajaj Auto | 1,424 | -6.0 | -1.7 |
| BANKS | |||
| Kotak Mahindra Bank | 466 | 7.6 | -4.3 |
| YES Bank | 319 | 6.4 | -4.0 |
| Bank of India | 389 | -10.3 | -3.6 |
| Icici Bank | 1,041 | -6.2 | -3.1 |
| Idbi Bank | 131 | -17.7 | -3.1 |
| IndusInd Bank | 269 | 4.4 | -3.0 |
| SBI | 2,442 | -10.6 | -2.9 |
| REALTY | |||
| Indiabulls Real Estate | 110 | -17.0 | -4.8 |
| Sobha Developers | 268 | -13.7 | -4.4 |
| DLF | 234 | -16.4 | -4.3 |
| Unitech | 34 | -45.8 | -4.0 |
| Anant Raj Industries | 83 | -19.8 | -4.0 |
| HDIL | 152 | -19.0 | -3.2 |
| CAPITAL GOODS | |||
| BHEL | 1,909 | -14.1 | -4.5 |
| Larsen & Toubro | 1,781 | -6.4 | -3.8 |
| Crompton Greaves | 175 | -41.5 | -3.7 |
| BEML | 557 | -44.2 | -3.3 |
| Suzlon Energy | 53 | -0.3 | -3.1 |
| Punj Lloyd | 74 | -31.7 | -3.1 |
| * From January 1 to July 25; ** July 26 over July 25 Source: BSE; Compiled by BS Research Bureau | |||
The markets reacted sharply, with the BSE Sensex falling two per cent to 18,518.22. Most rate-sensitive sector indices dipped by two to 3.6 per cent and stocks by as much as five per cent.
Rupa Rege Nitsure, chief economist, Bank of Baroda, says this move is a clear indicator that RBI prefers a slight moderation in GDP growth to around 7.5 to eight per cent, with inflation at an equable seven per cent, against a more heated pace of GDP growth at 8.5 per cent pulling inflation to 10 per cent levels. The cost of capital has to increase, given the existing supply-side stress and infrastructure deficit, she points out, adding that most growth indicators are still strong.
SECTORAL IMPACT
Given that most of the current eight per cent GDP growth has been consumption-led, the immediate impact on demand is expected in these sectors, mainly automobiles, cars and commercial vehicles, and housing, says Rajat Monga, CFO, YES Bank. Auto analysts have started pruning their volume estimates following the interest rate rises and feel the growth is likely to be in single digits for the current financial year.
Vineet Hetamasaria, auto analyst at Pioneer Intermediaries, says passenger vehicle volume growth estimates are likely to fall from 12 per cent for 2011-12 to eight to 10 per cent. The Society of Indian Automobile Manufacturers, which had lowered the volume growth number for the current financial year by 200 bps to 12-13 per cent, could revise this number downwards.
Given the drop in volumes, bottom lines of auto companies are also likely to be hit. Analysts believe a five per cent fall in volumes is likely to impact earnings to the tune of seven to eight per cent. They say the real impact on volumes will show from the month of August, which also marks the start of the festival season, wherein consumption usually surges.
On the realty segment, Monga says, “Although house prices mainly influence mortgage demand, which interest rates tend to compensate for, the prevailing rates will add to the impact.” Nitsure adds all construction-related sectors to the list, including steel and cement alongside consumer durables. And, envisages a slowing in GDP growth to 7.5-7.8 per cent, below RBI’s baseline projection of eight per cent GDP growth.
Investment-led sectors, which have been slow for the past two to two and a half years, will continue to see modest order book pictures. Likewise, companies in the construction space will also feel the heat. “The revenues (of capital goods companies) might not get impacted because of their order book, but there could be pressure on order inflows, which is already a concern. EPC (engineering, procurement, construction) players, which have large working capital needs, could see their earnings getting impacted,” says Rabindra Nath Nayak, senior analyst at SBI Cap Securities.
“We remain bearish on the (infrastructure) sector for at least for another one to two quarters, because in the rising interest rate cycle, the companies might report growth in revenue but profits’ growth could be muted, as most of the companies have high leverage in the balance sheet,” adds Abhinav Bhandari, who tracks the infrastructure sector at Elara Capital.
Analysts believe banks will most likely pass on the rate rises to customers but while this pass-through has been proportionate for the past six months, given the demand slowdown it may become lower.
Sectors catering to rural and semi-urban demand, including fast moving consumer goods, tractors and some luxury products could resist this trend, says Monga. But, urban-centric sectors, including malls and entertainment, may see demand slowing. He believes demand sentiment has already moderated but adds the busy festival season will be the test and demand slowdown could lead to price corrections. This was reiterated by Maruti’s management in their post-results’ analyst call. Apart from a general slowdown, rural demand has also has been less buoyant than in the past. They hope it will pick up in the festival season.
More significantly, no one is willing to call a peaking of rates given the RBI’s tone and Nitsure believes that this won’t happen till inflation decreases consistently week on week.
