ICICI Bank preferred to side with the compulsions of its bottomline than with a finance minister fighting rising inflation. On Tuesday, it raised its prime lending rate by a whole percentage point to 14.75%.
ICICI Bank’s move will certainly impact borrowers, especially the smaller companies and consumers.
For the bigger companies there are ample options - such as even raising money abroad - to skirt the blow.
The good news is, the impact on corporate earnings may not be as hard it may seem.
One key reason for this is the relative size of, and growth in, interest costs compared with other financial components.
Consider this: DNA Money, on February 5, 2007, had analysed the recent quarterly numbers of 1,800 companies, which had a combined market capitalisation of Rs 30,51,000 crore or about 75% of India Inc’s valuation on bourses.
During the December 2006 quarter, the growth in interest costs was just 18.13% to Rs 7,128.5 crore as against a 29.7% rise in net sales to Rs 483,758.2 crore for the quarter.
Look at it the other way, interest costs accounted for a mere 8.2% of the combined operating profit of Rs 87,027.3 crore, which had risen by 55.7% over the previous corresponding quarter. So long as this trend of faster growth in profits and sales continue, rising interest rates will not pinch hard.
The indirect impact for corporate India though could be a slowdown in consumer lending (led by a slowdown in demand), which could impact demand growth. But, it may just be too early to gauge the real impact of any possible slowdown in demand.
Shahina Mukadam, head-research, IDBI Capital Market Services, said interest costs in any case are on the uptrend for most of corporates.
“So, in the fourth quarter, we are going to see an increase in interest costs. For the corporate sector, the impact will be lesser than private individual borrowers simply because banks are not going to increase rates across the board for all corporate borrowers.”
Deepak Jasani, head of retail research at HDFC Securities says ICICI’s move was along expected lines because there is always a scramble for funds as the financial year comes to an end. “This signals that interest rates in the near term are going to remain firm,” he said.
According to Jasani, rate hikes will impact corporates that have not looked at raising funds from the equity markets in the last one or two years. “These are typically small and medium firms who are largely dependant on debt,” he said.
With regards corporate earnings, the trickle-down effect will be higher costs through increased input costs, according to him. “As long as the growth engine is chugging along, the impact may not be felt immediately,” he said.
What about the big-ticket firms? There’s little cause for worry since their borrowing costs are within single-digits.
Sanjeev Bafna, joint president and deputy CEO, Grasim Industries, said: “It may not have any immediate impact on us. Our cost of borrowing is pegged below 6%.” He says one should also not forget that PLRs are indicative rates.
SOURCE : DNA MONEY
ICICI Bank’s move will certainly impact borrowers, especially the smaller companies and consumers.
For the bigger companies there are ample options - such as even raising money abroad - to skirt the blow.
The good news is, the impact on corporate earnings may not be as hard it may seem.
One key reason for this is the relative size of, and growth in, interest costs compared with other financial components.
Consider this: DNA Money, on February 5, 2007, had analysed the recent quarterly numbers of 1,800 companies, which had a combined market capitalisation of Rs 30,51,000 crore or about 75% of India Inc’s valuation on bourses.
During the December 2006 quarter, the growth in interest costs was just 18.13% to Rs 7,128.5 crore as against a 29.7% rise in net sales to Rs 483,758.2 crore for the quarter.
Look at it the other way, interest costs accounted for a mere 8.2% of the combined operating profit of Rs 87,027.3 crore, which had risen by 55.7% over the previous corresponding quarter. So long as this trend of faster growth in profits and sales continue, rising interest rates will not pinch hard.
The indirect impact for corporate India though could be a slowdown in consumer lending (led by a slowdown in demand), which could impact demand growth. But, it may just be too early to gauge the real impact of any possible slowdown in demand.
Shahina Mukadam, head-research, IDBI Capital Market Services, said interest costs in any case are on the uptrend for most of corporates.
“So, in the fourth quarter, we are going to see an increase in interest costs. For the corporate sector, the impact will be lesser than private individual borrowers simply because banks are not going to increase rates across the board for all corporate borrowers.”
Deepak Jasani, head of retail research at HDFC Securities says ICICI’s move was along expected lines because there is always a scramble for funds as the financial year comes to an end. “This signals that interest rates in the near term are going to remain firm,” he said.
According to Jasani, rate hikes will impact corporates that have not looked at raising funds from the equity markets in the last one or two years. “These are typically small and medium firms who are largely dependant on debt,” he said.
With regards corporate earnings, the trickle-down effect will be higher costs through increased input costs, according to him. “As long as the growth engine is chugging along, the impact may not be felt immediately,” he said.
What about the big-ticket firms? There’s little cause for worry since their borrowing costs are within single-digits.
Sanjeev Bafna, joint president and deputy CEO, Grasim Industries, said: “It may not have any immediate impact on us. Our cost of borrowing is pegged below 6%.” He says one should also not forget that PLRs are indicative rates.
SOURCE : DNA MONEY
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