OB: Kaizad, the overall funding environment seems to be lot more conducive, but are companies keen to invest?
Kaizad Bharucha, ED, HDFC Bank: Honestly, there aren’t too many companies looking at major capital investments as they are already sitting on adequate capacity. There could be investments going into de-bottlenecking, but frankly there aren’t any billion dollar projects on the table which can be seen as triggering credit demand. How to bring down costs and use working capital more efficiently is what most companies are now focused on. But a larger stimulus for industry could act as a trigger for some serious capex.
OB: Where do you see rates at the end of this year?
Bharucha: I think the rate trajectory is well known. We’ve seen rates coming off quite sharply post demonetisation and a reversal of the trendline over the next couple of quarters is quite unlikely. Probably, there could be another 25 or 50 basis points cut on the outer limit, in the offing. With that we would be at the near-bottom as far as the rate cycle is concerned.
OB: Ramesh, given your exposure to dollar revenue, where do you think US rates are headed?
Ramesh Swaminathan, CFO, Lupin: I think it’s a wait-and-watch policy but rates are scheduled to go up in the US. As far as India is concerned, I believe it was the right time to usher in demonetisation as it brings in a deflationary impact in the economy because when GST gets introduced, you could see a couple of percentage points increase in inflation. Hence, the move will counter the post-GST inflationary trend which could last for a couple of years.
OB: What kind of dollar/rupee movement are you expecting, Rohitash?
Rohitash Gupta, CFO, eClerx: 2016 was much more stable in terms of rupee-dollar movement as against a constant slide in 2015. But I see a one-year forward premium of around 4% even if US rates were to increase a bit and Indian rates were to drop off. The interest rate differential would still be 3-4% easily. So, that kind of a forward premium gives you enough flexibility to plan your budgeting at least from a one-year perspective.
Bharucha: While there are so many moving parts, I think the rupee has played out well through this entire period [of demonetisation]. It hasn’t taken the brunt as much as people expected it to. Given the interest rate and forward differential, we should see a relatively stable rupee as it oscillates in the one rupee and one rupee fifty paise band. I don’t see it moving too far south very quickly.
Swaminathan: The spoiler could be oil prices as they’re moving up. For every dollar increase in oil prices, we expect a $1.4 billion impact on India.
Bharucha: But oil has gone up and receded very quickly to stay under the sub-$55 band. As long as it stays around that mark, I don’t see any cause for concern.
Swaminathan: People are talking 75 rupees to a dollar over time, which could actually mean a difficult time for India.
Bharucha: I wouldn’t give too much of a weightage to crude prices at this stage as there are several other moving factors that determine the forex rate. We had seen a lot of bullion demand post demonetisation but that has now fallen off. So that reduces the pressure on the import bill and, consequently, the rupee.
Sanjay Bahl, group CFO, Raymond: I’ll be more worried about China as the yuan devaluation is expected to continue given their economy is under pressure. Debt is at an all time high – 3x GDP, while property prices have gone up 50-60%, which is creating a bubble. Hence, there is a possibility of further devaluation and India cannot remains oblivious to that. From a competitiveness point of view, probably, the rupee will also depreciate. So, more than oil, it will be uncertainty around China’s economy and a possible China-US trade war escalation that could impact the forex market.
OB: Could there be any negative surprises from a funding perspective?
Bharucha: With the Trump administration taking over, we need to see what kind of announcements flow in and, hence, what impact it will have on the financial markets. But from an Indian context while that can alter the rate movement a bit, I think from a liquidity perspective over the next one year there’s enough and more liquidity in the system. So, funding is not going to be a big challenge.
OB: Ramesh, has Lupin's interest outgo reduced lately? You have about ₹7,000 crore of debt on your books?
Swaminathan: It’s not a large amount in that sense and most of it is in dollar, which is expected to go up. But if rupee depreciates, it will help us exporters.
OB: Rohitash, what’s the best use of cash? eClerx recently spent ₹240 crore on a buyback…
Gupta: The most efficient way of distributing excess cash to shareholders is the endeavour of most companies. Whether the same rules will hold good post Budget is a question mark. But most IT companies tend to have cash distribution at 50% of PAT, yet many complain about balance sheets floating with cash, especially if you look at Infosys kind of companies. But I believe IT companies will need cash to make investments to get closer to customers, which means more onshore presence; second, build new platforms and products and, third, re-skilling of people. But largely the problem will remain the same for IT companies as to what you do with the cash as you don’t want 6-7 months of revenue as cash on the books. So, dividends will be a popular way out.
OB: Barring the companies where cash is a problem, what is it that clients are doing?
Bobby Parikh, founder, BMR Advisors: Money for innovation, re-skilling, and acquisitions will be needed and if companies are not able to do then it should go back to the shareholder. Pressure will mount on companies which are not doing that.
Bharucha: As a banker, what we are seeing is that cash is being used more efficiently to reduce working capital, borrowings and to see how suppliers can be paid off quickly to get further cash discounts.
OB: Sanjay, working capital was a stress point for you all of last year…
Bahl: Post demonetisation, working capital has been a stress point as you don’t want to end up financing trade because that’s not our business. Our business is to sell apparels and fabric. But given that 40% of business comes through wholesale trade and it went through stress post demonetisation, we are seeing what we can do on the creditor’s side by extending credit facilities, unlocking of debtors and improving supply chain efficiencies.
OB: Anything specific you propose to do this year?
Bahl: We are working on incentivising the trade to pay early and are extending credit facility as well. The good thing is that a lot of money is available at a cheaper rate.
OB: But to who is it available is the question?
Bharucha: We do have supply chain models of financing which bring in value both to the supplier as well as to the corporate. There are different models based on different industries and risk profiles. There are also models on the dealer side. Presenting an integrated model and delivering that seamlessly on an electronic platform is gaining more and more acceptance.
This is the second of a two-part series. You can read part one here.
