News: India Inc sweats as rates get harder
(TNN 12/04/2006) Mumbai - It came as a nasty surprise to many bankers. Amid a crunch in the money market, they stumbled upon a clever game that many corporates, even PSUs, have played. As banks scrambled for funds, corporates took pre-sanctioned working capital loans to park them at higher rates with other banks. It was like borrowing at 8% from bank A to park money at 8.5% or even 9% with bank B.
The arbitrage game lasted for weeks, as many banks were desperate to get funds. They didn’t know from where the corporates got the money. With large banks and mortgage institutions willing to borrow 46-day money at over 9%, corporates with a little extra cash in their treasury made quick money.
But such games don’t last for long. Today, corporates know that they will have to survive a rising interest rate regime. An analysis of over 1,000 companies in the manufacturing sector reveals that the impact of a 50 basis points (bps) rise in interest rates on a company’s margin is not yet substantial. This is so because debt exposure of corporates on an aggregate basis is still not very significant and interest cost as percentage of sales is 1-2%, barring a few groups analysed.
This analysis is based on FY05 results, and may vary if there are significant changes in the corporate debt structure going forward. The impact of a hike on PBT margin, on an aggregate basis for 1,044 companies, would be a 11.2 bps decline. The impact on net margin would be even lower, depending upon the tax obligation.
While it looks tolerable at this stage, the going could get tough in the days to come. First, there are all indications that rates would further harden; second, with most corporates lining up ambitious expansion plans, they would borrow more.
On sectoral basis, the impact is most pronounced in textiles and mineral product such as cement. The aggregate impact on textile firms is 25.5-30.4 bps whereas for the mineral products sector, it is 21-30.1 bps. The chemicals sector is least affected with only 7.2-14.8 bps impact. This sector also has least interest cost/sales ratio of 0.88-2.15%.
The data is divided into two classes: first, with sales between Rs 100-1,000 crore, and the second group with sales over Rs 1,000 crore. The impact of a hike in interest rates is more pronounced on 884 companies in the first group, with PBT margin going down by 18.6 bps. In comparison, the margin for 160 companies in the second category is down by only 9.2 bps.
The impact on companies, in the first group, is greater as these companies have greater debt exposure. Also, these companies do not have adequate bargaining power to fish for better finer loan rates. For instance, the average interest rate was 7.60% for companies in the first group, while it was 6.81% for those in the second group, about 80 bps advantage.
The arbitrage game lasted for weeks, as many banks were desperate to get funds. They didn’t know from where the corporates got the money. With large banks and mortgage institutions willing to borrow 46-day money at over 9%, corporates with a little extra cash in their treasury made quick money.
But such games don’t last for long. Today, corporates know that they will have to survive a rising interest rate regime. An analysis of over 1,000 companies in the manufacturing sector reveals that the impact of a 50 basis points (bps) rise in interest rates on a company’s margin is not yet substantial. This is so because debt exposure of corporates on an aggregate basis is still not very significant and interest cost as percentage of sales is 1-2%, barring a few groups analysed.
This analysis is based on FY05 results, and may vary if there are significant changes in the corporate debt structure going forward. The impact of a hike on PBT margin, on an aggregate basis for 1,044 companies, would be a 11.2 bps decline. The impact on net margin would be even lower, depending upon the tax obligation.
While it looks tolerable at this stage, the going could get tough in the days to come. First, there are all indications that rates would further harden; second, with most corporates lining up ambitious expansion plans, they would borrow more.
On sectoral basis, the impact is most pronounced in textiles and mineral product such as cement. The aggregate impact on textile firms is 25.5-30.4 bps whereas for the mineral products sector, it is 21-30.1 bps. The chemicals sector is least affected with only 7.2-14.8 bps impact. This sector also has least interest cost/sales ratio of 0.88-2.15%.
The data is divided into two classes: first, with sales between Rs 100-1,000 crore, and the second group with sales over Rs 1,000 crore. The impact of a hike in interest rates is more pronounced on 884 companies in the first group, with PBT margin going down by 18.6 bps. In comparison, the margin for 160 companies in the second category is down by only 9.2 bps.
The impact on companies, in the first group, is greater as these companies have greater debt exposure. Also, these companies do not have adequate bargaining power to fish for better finer loan rates. For instance, the average interest rate was 7.60% for companies in the first group, while it was 6.81% for those in the second group, about 80 bps advantage.
posted by InCar Group Press Room at 14:06
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