New Delhi: Cost of money has been shooting up for the last twelve months after RBI has consciously tightened liquidity. It has started to affect India companies which have seen a huge rise in their interest burden. This has been to the tune of 116% in the last quarter of fiscal 2007, according to an Interest cost analysis carried out by Assocham amongst 150 companies during Q4.
Worst hit companies in the survey represented real estate, engineering, IT and financial service sectors, which witnessed more than double increase in interest rates.
The Reserve Bank, in its pursuit to combat inflationary pressures in the economy and control the growing strains on domestic capacity utilization, has hiked the cash reserve ratio and repo rate by 100 basis points and 125 basis points in stages during 2006-07. Consequently, the benchmark Prime Lending Rate of public and private sector banks has also increased by 1.5 - 2.5% within the same period.
One year weighted discount rate on short-term debt instruments like commercial paper and certificate of deposits shot up by 2.73% and 8.18%.
Hardening of interest rates has started hitting the bottom lines of the industry. Corporates are still unsure whether interest rates have peaked or there is still scope of further liquidity squeeze by the RBI. Corporate results are an indication towards demand being impacted in the coming quarter and investment plans being hit leading to capacity constraints if the cost of money keeps its upward trend.
Real estate companies have suffered a major setback from the central bank’s money tightening policies as their toplines and bottomlines have shown a much slower growth than their respective interest costs. Shrinivasan Shipping and Property Development Ltd paid 38 times more interest in Q4 of financial year 2007 than the corresponding period of the last year whereas its net profit increased by mere 11.5%. Interest expenses of Era Constructions escalated by 545% as compared to 242% and 140% in total income and net profit.
Interest burden of the engineering sector has increased more than six times in the reported period. The interest cost of Best Crompton and Engineering Ltd and Alfa Laval India has increased by 640% and 231% while their toplines have grown by a mere 11% and 37%.
IT sector saw a huge jump with borrowing costs increasing by 234% followed by high interest rate regime in the economy. Also, companies providing financial services have shed around 140% more interest in Q4 of financial year 2007 as compared to the same period of FY2006.
Top five Indian companies which have shown sharpest increase in their interest costs during the fourth quarter are Shrinivasa Shipping at 3850%, Tata Elxsi at 1718%, Teledata Informatics at 1292%, DISA India Ltd at 1033% and Core Projects and Technologies at 1012%.