M. Ramesh

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Chennai, June 25 The 50 basis points hike in the Cash Reserve Ratio announced by the RBI on Tuesday, does not appear to have affected the large companies too much.

A quick chat with some of them shows that they either have options up their sleeve to counter the higher interest costs or believe they will be able to pass it on to customers.

In fact, some debt-free companies, which have cash in banks, are happy, for they would earn more on their deposits.

A good example of that is the public sector power generation company, Neyveli Lignite Corporation. The impact of the CRR hike has been, if anything, positive for the company, which has deposits of Rs 4,800 crore with banks on which it expects to earn higher interest. Even 50 basis points increase in deposit rates would fetch the company around Rs 25 crore of additional profits.

Sterlite Industries is another example. The Indian metals major raised $ 2.4 billion through an ADS issue recently and is sitting on a cash surplus of $ 1.8 billion (Rs 5,600 crore). The entire surplus is parked in India, invested in liquid instruments in accordance with the company’s policies. As such, the CRR hike is “positive” for Sterlite, says Mr Sushil Gupta, Chief Financial Officer.

The Rs 339-crore Nippo Batteries is another example of a debt-free company, with Rs 30 crore in bank deposits. This company worries about fluctuations in zinc prices and is unhappy over the way manganese prices have gone up, but a CRR-hike induced interest rate rise is not a bother at all.

Large companies, especially those that need to raise funds for infrastructure projects, have the alternatives of external commercial borrowings, suppliers’ credit and bonds. NLC is on the throes of an expansion project and intends to raise Rs 1,850 crore of long term debt. But here again, the company expects no big impact, says Mr J N Prasanna Kumar, Chairman and Managing Director.

In a meeting held soon after the RBI raised CRR rates, NLC decided to go in for a $ 100 m external commercial borrowing—the maximum allowed. Funds raised through ECB can be used to meet rupee expenditure for infrastructure projects.

Mr Kumar said that NLC would keep a part of the ECB funds unhedged, to take advantage of the lower rates.

The rest of the funds would be raised from the domestic market. Earlier, the ‘AAA’ rated company was trying to choose between a bond issue and term loans from banks, but now, post-CRR hike, it would prefer a combination of the two instruments, Mr Kumar said.

NLC also needs to raise funds – about Rs 3,800 crore – for its Tuticorin power project. Since this project is being executed by a separate company—a joint venture in which NLC has 89 per cent stake—banks charge a higher rate of interest than they would for NLC.

Because of this, NLC is in favour of raising loans from Power Finance Corporation and Rural Electrification Corporation. They would provide loans of 10-year tenor, with a fixed interest rate of 11.15 per cent. Again, the CRR hike would have no impact on funding for the project.

Chemplast Sanmar, which is putting up a Rs 450-crore PVC project at Cuddalore, also feels no heat. It has tied-up funding for the project and is therefore insulated against rate hikes. But for working capital, it sees scope for relying more on suppliers’ credit—the company imports ethylene. This option was always there—and has been used in the past—but now looks more attractive.

Chemplast’s Managing Director, Mr P S Jayaraman, feels that since India’s growth story is still intact, interest rates would moderate in six months to one year, when capital flows from abroad would come back. In the meantime, there could be a spike of about 25-30 basis points in short term loans, but feel that that could be passed on to customers.

Our Delhi/Mumbai bureaus add:

On the other hand, Mr Seshagiri Rao, Director (Finance), JSW Steel Ltd, said the steep rise on both counts would take away liquidity in the market and make borrowings dearer. The capex plans of many companies will be affected, especially of those where financial closures have not been completed. Internationally, lenders have become selective and now the same situation has come about domestically. It is altogether a challenging environment to raise either equity or debt.

Mr Ajay Seth, CFO, Maruti Suzuki, said while high interest rate does affect the industry, there will not be any slowdown in the company’s investment plans and they stay as announced earlier.

“It was unexpected that both CRR hike and repo rate hike would come together. I don’t think any of us will be able to absorb the full impact of this. We will have to look at increasing the cost of auto finance,” said Mr Ramesh Iyer, Managing Director, Mahindra & Mahindra Financial Services Ltd. “It is not just the interest rate alone. The capital cost of vehicle, the operational cost and the acquisition cost have gone up. It will slow down the industry,” Mr Iyer said.

Dr B.P. Dhaka, Chief Operating Officer, Parsvnath Developers, said home loans rates will become more expensive for consumers, while developers will be affected by the liquidity crunch. Together these factors would have a negative effect on the real estate sector and the market, which is already sluggish will move towards a slowdown. However, as a company we will not feel the pinch of liquidity crunch as our creditworthiness is high and the debt equity ratio, favourable, he said. .

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