New Delhi: India Inc’s bottomlines were hit hard by as much as 116% rise in interest rates in the fourth quarter of 2006-07 as the Reserve Bank tightened money supply to combat inflation, industry chamber Assocham said.
“The corporate results are an indication toward the 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,” Assocham President Venugopal Dhoot said.
In a survey of 150 companies, Assocham found that the worst-hit companies were from real estate, engineering, IT and financial services, which have witnessed cost of money rising by more than double.
However, there are some sectors like telecom, entertainment and infrastructure that have reduced their borrowing cost, according to Assocham Eco Pulse Study on Interest Cost Analysis of 150 companies during the fourth quarter of 2006-07.
The corporates are still not sure whether the interest rates have peaked or there is still scope of further liquidity squeeze by the RBI.
The real estate companies have suffered the major setback from the central banks money tightening policies as their top-lines as well as bottom-lines have shown a much slower growth than their respective interest costs.
Shrinivasan Shipping and Property Development Ltd has paid 38 times more interest in the fourth quarter of 2006-07 than the corresponding period of the last year whereas its net profit has increased by a mere 11.5%.
The interest expenses of Era Constructions have escalated by 545% as compared to 242%, where as total income and net profit went up by 140% rise.
“Clearly, RBI’s tight money stance has hit right at the profitability of the companies, adversely affecting the growth of real estate industry,” Dhoot said.
The 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 top lines have grown by merely 11% and 37% respectively.
According to AEP, IT is another sector which saw a huge jump in borrowing costs by 234% due to high interest rate regime in the economy.
Satyam Computer Services and Triton Corporation are among the highest interest bearing IT companies with more than seven times high debt servicing costs in 2006-07.
Companies providing financial services have shed around 140% more interest in fourth quarter of financial year 2007 as compared to the same period of FY 2006.
Cholamandalam DBS finance Ltd has paid 188% higher interest as compared to the rise of 143% in its total income.
The interest cost of India Bulls is up by 114% with 176% increase in its total income and 95% rise in net profits of the broking company.
The other sectors, which have seen a considerable rise in their debt burden, are healthcare (74%), electronics (70%), auto (57%), chemicals (47%), textiles (38%) and capital goods (35%).
The telecommunications majors in India have resorted to paying back their debts, resulting into lower interest costs. MTNL has reduced its interest burden by a whopping 99% with 47% increase in its net profits. Private Players like Bharti and Idea cellular have paid a mere 13% and 10% higher interest.
The borrowing cost of the infrastructure sector has increased marginally by 18% as the majority of companies have reduced their interest burden by paying back the debt amount.
The same is the case with steel, oil and gas companies.
The Reserve Bank, in its pursuit to combat inflationary pressures in the economy 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 banks has also increased by 1.5% and 2.5%.
The one-year weighted discount rate on short-term debt instruments like commercial paper and certificate of deposits has also shot up by 2.73% and 8.18%, the AEP study said.