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Rediff News  All News  » Business » High interest cost will hurt EPS

High interest cost will hurt EPS

June 02, 2011 11:24 IST

Besides construction and real estate, even consumer staples and telecom are likely to be substantially hit. The negative impact of an inflationary environment on corporate profitability is already a big worry for 2011-12.

Importantly, after the interest rate rises by the Reserve Bank of India (RBI) in the recent past, there is a high probability of corporate India getting hit on profits.

For instance, according to a report published by Goldman Sachs, under a scenario based on higher crude oil prices, increased interest rates and lower GDP growth, the most impacted sectors in terms of a hit on 2011-12 earnings will be construction, cement and real estate, media and consumer staples.

These are part of the brokerage's own universe of covered companies.

Interest rates have gone up and there are expectations of more increases. "We are calling another 50 basis points over the next two (RBI) meetings, with the possibility of upside risk if inflation remains quite high. A large part of the fuel price inflation is still not passed on and that will happen over the next few months," says, Samiran Chakraborty, regional head at Standard Chartered Research.

In this scenario, where banks have started charging companies in excess of 13-14 per cent, those which had relied on borrowed funds are bound to see their margins eroding.

For instance, the interest-sensitive construction sector is in the top list prepared by the Goldman Sachs report under the second scenario, where the sector could have a 30.4 per cent negative impact on estimated earnings 2011-12.

This could hit working capital requirements, as most construction companies depend on borrowing.

For instance, the Motilal Oswal data shows infrastructure companies (MOSL universe) in 2011-12 have a debt to equity ratio of 1.8, highest in the list.

The list also mentions that the interest cost of these companies is almost 42.9 per cent of the estimated Ebitda (earnings before interest, taxes, depreciation and amortisation) in FY12.

Among others which have a higher percentage of interest cost to operating profits are metals and real estate. The latter could get hit because of both, the higher interest rates and construction cost.

So far, the biggest worry has been crude oil prices. Petrol prices, now Rs 68.3 per litre in Mumbai, have risen 22 per cent in a year.

A rise in diesel prices will follow soon. All this is going to have a cascading impact on the overall increase in cost.

The automobile industry, particularly heavy vehicles, could remain in the limelight, especially as metal (input) prices have gone up, too.

Higher prices for metals as with steel, aluminium, copper and zinc will not only be negative for the auto companies but also worry engineering companies, which have already seen pressure on margins.

In this scenario, even food inflation, which cooled to 7.47 per cent in the week ended May 7 compared to 22 per cent in the corresponding period last year, could remain at higher levels.

"While the food inflation might have gone down a bit, it remains very high. The increase in fuel prices, coupled with a lower base, will result in higher numbers in the coming weeks," says economist Siddharth Shankar at KASSA.


Jitendra Kumar Gupta in Mumbai