Given promoters’ ability to infuse fresh capital remains limited, firms must raise money from institutions and do so well before their very survival is at stake, Kotak says.
Exhorting companies to raise capital before their survival is at stake, CII president Uday Kotak says the disruption due to the pandemic could see a host of inefficient businesses sinking, triggering widespread consolidation. Kotak believes the long-elusive private-sector capex may turn the corner “anytime between the next six and 12 months”.
The CII chief says India Inc must shun excessive obsession with short-term growth pangs and look at raising capital to tide over the pandemic and reap medium-term gains.
Given promoters’ ability to infuse fresh capital remains limited, firms must raise money from institutions and do so well before their very survival is at stake, Kotak says. ”With economies across the globe unleashing stimulus, the good thing is liquidity remains unparalleled. It’s no longer ‘helicopter money’, it’s a Dreamliner full of money,” Kotak said.
“Don’t be excessively obsessed with how much capital you have yourself, you need capital as a buffer and for your core ability to grow. So, don’t worry about the percentage of ownership, etc, at this time. Go out there, raise capital, dilute and don’t be excessively fussy about the (equity) price,” Kotak told FE.
The new CII chief believes the disruption due the pandemic could result in consolidation across industries and inefficient firms may invariably sink, just as the country witnessed in the telecom sector — from 13, the count of (private) telecom firms came down to just three.
“The market is saying something. We need to ask ourselves if we are looking too much at short term growth instead of what it can be, and as a country, if we need to look beyond here and now,” Kotak said. Economists have forecast a GDP contraction of up to 6.8% in FY21 versus an expansion of 4.2% in FY20, an 11-year low. However, the markets continue to rally. The Sensex rose from 30,029 points on May 18, after the government’s latest relief package, to 34,287 points on June 5, despite Moody’s downgrade of the sovereign rating last week.
Kotak believes the long-elusive private sector capex may turn the corner “anytime between the next six and 12 months”, as businesses would seek to cash in on opportunities. “At CII, I am also focussing on where we must step up investments. For instance, we are woefully underinvested in healthcare and education….”
Gross fixed capital formation (GFCF), as a share of GDP collapsed to 29.8% in FY20 from as much as 34.3% in FY12. GFCF contracted by 6.5%, the lowest in the current GDP series, in the January-March period, the third straight quarter of fall.
While the banking sector is staring at massive losses that will potentially erode lenders’ capital base substantially, the CII chief cautioned against any liberal regulatory forberance on capital requirement, or any other aspect. “We have to be very careful about it. Forberance has to be very narrow and focussed,” Kotak, also the managing director of Kotak Mahindra Bank, says.
Asked about subdued credit flow, Kotak says there is a risk aversion even among borrowers, many of whom don’t want money in times of a lockdown. Also, borrowers whose credit-worthiness is not sound obviously are finding it difficult to get loans, while some of the good companies are raising funds from the bond market. Credit growth has remained muted since the last fiscal and has been hovering around a two-year low. Non-food credit growth stood at just 7.3% year-on-year as of April 26, against 11.9% a year earlier.
Commenting on whether the government’s Rs 21-lakh-crore relief package, consisting mostly of supply-side instruments, is enough to reverse an economic slide, Kotak points at the certain not-so-visible costs to the exchequer from various steps recently announced and the realities of an uneven global economic playing field. First, before the pandemic, the general government deficit was expected to be about 6-6.5% of GDP and now, it could be 11-12% (of course, revenue collection has petered out, etc), he says. Second, the centre will have to capitalise state-run banks to keep credit flow unhindered. Third, the hidden liabilities accruing from various recent government initiatives, such as guarantee on Rs 3 lakh crore loans to MSMEs, and from the debt levels of various government arms like NHAI, will have to be watched out for.
“Now, look at the other side of the coin. Ours is not a reserve currency. Rating agencies seem to have different standards for the US and Europe than for us… If I am in the government, I would think about a medium-term strategy,” Kotak says. “Everybody wants a quick steroid, and understandably so. But if we have to sustain our medium-term growth, we need to keep the ability to spend sustainably, consistent with the medium-term goals,” he adds.