Amidst mounting expectations from RBI to reduce benchmark rates at a higher pace even as there has been negligible transmission of the 75 basis points...
Amidst mounting expectations from RBI to reduce benchmark rates at a higher pace even as there has been negligible transmission of the 75 basis points repo rate cut so far this year, India Inc’s interest cost has already started showing signs of abatement.
In a tepid economic environment depicted by a demand slow-down, lower capacity utilisation and lower revenue growth, the interest cost for Indian companies in fiscal 2014-15 reported its slowest growth in the last five years. For a clutch of 947 listed companies excluding those from IT, finance, trading, capital goods and pharma space, the aggregate interest cost for the year grew at 10.25% to R1.79 lakh crore. This is the slowest growth for the cost parameter in last five financial years.
However, due to moderate growth in net sales of this universe, the interest outgo as a proportion of the top line moved up by 33 basis points to 4.79%, its highest since FY08. Moreover, interest cost was still the only financial parameter that reported highest annual growth, compared to others including employee cost, raw material expense, operating profit and net profit. In fact, last three of P&L entries witnessed a decline in FY15 compared to the previous year.
In a recent research note, Nomura analysts noted that incremental substitution to corporate bank credit is happening at a very rapid pace. They estimate that bonds contribute close to 60% of incremental credit in the last 12 months while the share of bank funding is down to 25% during the period.
The slow-down in interest outgo, albeit on a bigger base, seems to be an outcome of companies trying to diversify their borrowings in order to better manage the finance cost at a time when a strong revenue growth is difficult to come by.
For example, Tata Steel that carried net debt of Rs 70,683 crore at the end of FY15 and raised $1.5 billion from the international bond market last year, is planning to raise another Rs 10,000 crore in FY16 through international and domestic capital market.
The company in its annual report acknowledged that dynamic financial markets provide a “window of opportunity” to raise cost-effective capital and lengthen the maturity profile of the company’s debt. For FY15, the company’s finance cost increased by 11.8% to Rs 4,849 crore, representing the steepest annual growth since FY11 when it inched up by 31% to Rs 3,956 crore.
Even Tata Motors worked on its cost of borrowing in FY15, by partially prepaying higher coupon bonds worth 500 million pound (8.25%) and $410 million (8.125%) with debt instruments with coupon rates 3.5% and 3.875%. These steps seem to have paid off given that FY15 interest cost of the automaker was Rs 4,861.5 crore, up 2.4% as against an average y-o-y growth of 26% between FY12-FY14.
According to Ajay Manglunia, head of fixed income at Edelweiss Financial Services, corporates that boast good credit rating are utilising the debt market to fund their borrowing needs given the widening difference between the bank borrowing rates and underlying yields in the debt market.
“At best a better rated company can borrow from banks at base rate. However, for both short-term and long-term debt market instruments, their borrowing cost could effectively be 150-200 basis points lower. This gap has widened from 50-60 bps in early 2015,” added Manglunia.
Bloomberg data shows that companies like L&T, JSW Steel, Tata Motors, and Reliance Industries raised anywhere between $200 million to $1.75 billion in FY15 by issuing offshore and onshore bonds in with yields ranging from 4.12% to 10.5%.
Although, interest cost at a meagre 0.89% of its net sales does not have any material impact on cash-rich corporate major like Reliance Industries, finance cost of the oil and gas giant declined by 13.6% to Rs 3,316 crore in FY15.
Not surprisingly, against an incremental bank credit of Rs 2.2 lakh crore in FY15, Indian companies raised close to Rs 5.4 lakh crore, through private placement and overseas capital market debt offerings during the period shows data compiled by Prime Database.
While bigger companies with superior credit ratings have managed to tap into such alternatives, highly leveraged, capital intensive companies continue to rely on bank financing for their incremental loan requirements. Not surprisingly, troubled companies are trying to get their current liabilities restructured from banks, even by using RBI’s 5/25 scheme under which the loan tenures are extended up to 25 years with a fresh evaluation of the loans every five years.
During FY15, many highly leveraged companies from the metals, power and construction space saw their interest cost soar. For example, as the finance expense of Bhushan Steel, JP Associates and GVK Power increased by 20% to 50% in FY15, the cost accounted for more than 25% of their net sales for the year.
Lower capacity utilisations across industries have also played their part in lower corporate loan uptick. Latest RBI data shows that for the three months ending March 2015, the aggregate utilisation rate for a set of 1273 manufacturing companies stood at 75.2%, compared to 76.2% for the same quarter in the previous fiscal.