Rate hike: Nervous cos face profit decline, project delays

The increase of 50 bps in interest rates spooked the market and the business community alike. Share prices took a sharp downturn on Tuesday as those betting on the future profit growth of their companies received a big setback.

Gautam Thapar of Avantha Group was quick to react and told Press Trust of India that the expectation was of 25 basis points. “The RBI has seen something that the industry has not,” he said. He expects the business sentiment to be affected as a result of this policy action.

R Balarami Reddy, finance director at IVRCL Infrastructure, a Hyderabad-based company that builds water distribution systems, roads and buildings, feels that an increase of 0.5 percent in repo and reverse repo rates by the Reserve Bank of India would push banks to hike lending rates. Reddy believes that his borrowing cost would go up by 0.25%.

“A 0.25% increase in borrowing cost will simply shave off Rs 3.5 crore of our profit this year,” Reddy said by making a quick back-of-the-envelope calculation for the remaining 8 months of the financial year ending March 2012. IVRCL reported a net profit of Rs 157 crore for the year ended March 2011.

Assuming that the net profit grows 15% for March 2012, it would rack up a net profit of close to Rs 180 crore. This means the announcement made today by the RBI governor D Subbarao takes away 2% of the expected net profit.

Reddy said his company would be able to pass on the cost for all future projects, but for the current borrowing of about Rs 2,000 crore, the company would have to absorb the high cost of money. IVRCL could explore options to sell some stake in road and other project related assets to raise cash in the short term.

Another company, Nava Bharat Ventures, which is into the power sector, is looking to explore overseas borrowing options. GRK Prasad, finance director at the company, said Nava Bharat Ventures had debt-equity ratio of 0.3 and could easily look at overseas borrowing which appears to be reasonable.

He clearly sees a slowdown in future projects. He said that hiking interest rates is the only tool the government has to tackle inflation. The move could hurt overall corporate borrowing. “Planned projects would face viability issues,” Prasad told Firstpost. He said all new projects could get delayed.

Pradeep Jain, Parsvanath Developers, said RBI’s move of hiking key lending rates by 50bps each was quite unexpected and would lead to an increase in cost of funds for the real estate developer. See video:

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