The meltdown in the markets and the slowdown in the US may severely hamper corporate India's investment plans. "Raising money will be difficult," concedes Sajjan Jindal, CEO, JSW Steel.
"It is the end of the street for global source of funds. Credit availability will be difficult, forget the spreads getting wider," said Anil Singhvi, MD, Ican Investments Advisors, which advises foreign institutional investors.
The primary sources of funding, IPOs or FCCBs (foreign currency convertible bonds), will dry up. Internal accruals, the other source, will be constrained as corporate profits are likely to grow slower this quarter, say merchant bankers.
Experts say that until the market bounces back to a respectable level and creates confidence among investors, who could look forward to some price appreciation, IPOs will not be successful.
FDI will also be affected
The sentiment could also hit the flow of foreign direct investment. "When business psychology gets affected, everything gets stalled. FDI is very sensitive to business climate," says D H Pai Panandiker, President, RPG Foundation.
Private equity flows could also be constrained. Singhvi says, "India is not perceived to be a safe haven, it is still perceived to be an emerging market with political and economic constraints. They may prefer to invest in Brazil."
While long-term projects may not be affected, new projects on the drawing board may be deferred.
"If someone is planning a new project, he may wait a bit for the global uncertainties to end and domestic demand to look up," said a banker.
Growth rate will come down
"We are in an investment mode. The funds crunch and high cost of funds will hurt us," says Sanjay Labroo, President, Auto Component Manufacturing Association. He expects the industry's growth rate to come down from 20 per cent to 10-11 per cent.
If you were planning to ride India Inc's globalisation wave and pick up assets in distress, forget it. Funding an acquisition will be increasingly difficult. Gone are the days when you could buy a company abroad by leveraging its assets.
"The leveraged buyout (LBO) market has been impacted. Lenders who have taken a hit on their balance-sheet can't provide the kind of leverage they were providing earlier," says Samiran Chakravarty, Chief Economist, ICICI Bank.
Internal accruals under stress
Internal accruals, the other source of funding for projects at home, have come under stress as corporate profit growth is likely to slow down from 25 per cent to 20 per cent this quarter. This is because a slowdown in demand is hurting profitability.
"Sales volumes are low. So, even if margins are the same, overall profitability could be dented," says Chakravarty. The credit growth has come down to 23 per cent from 29 per cent in 2006-07 though industrial off-take has been good.
FIIs selling to keep rates high
With FIIs selling in Indian market, interest rates are likely to remain high.
"When the FIIs are taking their money out, RBI has to release dollars unless it wants the rupee to depreciate. Reserves will have to be drawn and rupees get soaked out in the process. So, interest rates will remain high," says an economist.
Bankers say that since credit spreads have increased, borrowing costs will be impacted though it may differ from corporate to corporate. Borrowing costs could rise by 100-400 basis points though this would be partly mitigated by the fall in Libor (by 200 points) since the credit crisis began unfolding.
Corporate investment down
"Corporate investment will be definitely affected. As the IIP figures reveal, capital goods production has come down as demand is drying up," says Panandiker.
The investment climate has been impacted by the credit crisis and the slowdown in the US economy, which is likely to have a zero growth in Q, and possibly Q2.
The US economy, though, could revive after that. "Financial markets, which have been chaotic, will improve and stabilise by the second half of 2008, which is when we expect Indian markets to get real strength. The investment climate should improve in a couple of months after that," says Panandiker.
Of course, companies can go for private placement but it is an expensive option. "Private placement has become expensive. There is too much of risk aversion. Since the risk premium is high, they will raise less money," adds an expert.
Telecom plans may get affected
Investment plans of new entrants in telecom may get affected as they will find it difficult to bankroll their plans. In January, the government had given licenses to nine new firms to roll out GSM mobile services.
"Lenders may take a call based on a firm's growth potential. We expect interest rates to soften in international market," says S Subramaniam, CEO, BPL Mobile, which plans to invest $2 billion to roll out its services in 23 circles.
