How will inflation hit India Inc's capex plans?

Excerpts from CNBC-TV18's exclusive interview with Sanjiv Goenka & JC Sharma:

Q: Do you see an across-the-board fall in real estate prices and real estate demand in most centers if not all centers? Do you see a genuine problem of money coming into the hands of real estate developers, which could create further problems for development?

Sharma: As far as the decrease in the prices of real estate products are concerned, for residential- we do not foresee any kind of a fall.

We are aware of this slowdown and we are aware that when inflation and interest cost both are tending to go on a higher side kind of a thing. It does put pressure on the customer but at the same time we had the manufacturing cost going up or the input cost keeps going up. Somewhere these kinds of things needs to be looked at in totality and we are selling a product, which is not perishable like an airline industry.

Q: Next twelve months how do you foresee the price situation?

Sharma: We feel that price situation is stabilizing. We do not foresee that the cement prices or steel prices in this kind of a scenario can continue to go up. So at twelve months scenario from now onwards we are seeing prices of input cost also stabilizing and customers coming back with affordability index also going up simultaneously.

We are seeing that inflation also will cool down with the increased procurement and production of food grains. The advance tax collections appear to be on a higher side, right now it is more than 20% as on June 20.

So somewhere corporates should be able to take care of this situation and see to it that the demand comes back.

Q: You come in on your reaction to the inflation figure at 11.05% the fact that rates are expected to move higher. What kind of an impact do you see or tightening do you see in the investment or capex cycle for corporates such as yours?

Goenka: If this figure continues to remain at this level, which I don’t believe it will; but if it continues to remain at this level then margins will come under pressure. If margins come under pressure then investment could get impacted.

Q: At the moment the impression seems to be that inflation is simply not cooling off like I was referring to the manufacturing Index that forms 66% of the Wholesale Price Index (WPI). It’s being steadily going up at 0.3%. So it’s not just fuel it’s across the board rise in prices that we are looking at and at the moment the yearly average comes very close to 9% on inflation, chances are that rates will be hiked not once but maybe a couple of times by the Reserve Bank of India. If there is a 100 bps rise in interest costs how are you looking at capex plans in the first place?

Goenka: As far as we are concerned our plans are committed and more or less funded. So we shall go ahead with our existing plans but if one were to generally look at investments overall in the Indian economy if interest rates go up, if cement and steel continues to go up, if inflation continues to be at this level then definitely there will be an impact on the overall basement. 

Q: What is the requirement at this point on time for your company to execute the current projects and are you adequately funded?

Sharma: As far as we are concerned, our construction cost is less than half of our realizations and three fourths of our ongoing projects have been sold out. So we feel that our internal accruals and the fundings that we have got with our institutions should be sufficient enough for us to keep investing in our projects.

Q: At what point do you think corporate India may not be able to go ahead with its capex plans? Chances are that they could see even higher rise in interest costs-in the cost of money. In fact these are not figures, which people track but the overnight index swap market, which is the most liquid market for interest rates, is pointing to a five-year rate of 9.6% and a ten year rate of over 10%. This is the pure Government Securities (G-Sec) market, corporates will have to perhaps borrow at higher levels, when do you think you may have to pass on the cost of your own raw materials? How many price hikes do you see in the power sector? At what point do you think capex plans could be under threat?

Goenka: As far as we are concerned, the plans that we have announced are not really under threat but overall margins are appearing under stress and under pressure. If this continues then definitely, there will be a rethink on capital expenditure. Not as far as the Rs 18,000 crore investment plan that RPG has, because that is almost all taken care of and that seems fairly secure. But going ahead one will look again if interest rates keep going up.

Q: There is another round of rate hikes from banks seems very much on the cards. If interest rates were to go up by say 0.5% or even more, Equated Monthly Installments (EMIs) would shoot up accordingly do you think then there would be a fall in the demand for residential projects?

Sharma: There will be an impact because housing industry is definitely interest sensitive. If EMI go up somewhere there will be pressure on the customers to differ.

Q: Any percentage calculations on how much you might see real estate prices therefore going down in the next 12-months?

Sharma: These are two different questions. One is the demand slowdown on account of the interest cost hike where affordably it gets impacted. To that extent the market is already witnessing some kind of a slowdown in the sales.