Moneycontrol
Sep 30, 2015 06:57 PM IST | Source: CNBC-TV18

Need 200 bps cut to revive capex, 50 bps paltry: HCC

Since it takes one year for the rate cut to have an impact, atleast a 200 bps rate cut was needed to revive the capex cycle, Ajit Gulabchand explained.


Ajit Gulabchand, chairman and managing director of Hindustan Construction Company (HCC) was hoping for a much higher quantum of rate cut than what the central bank governor Raghuram Rajan dished out on Tuesday. "...a 50 bps rate cut is welcome, but it is insufficient. ...I expected at least 300 bps but if not that, 200 bps as an initial cut to create the impact that is necessary," a disappointed Gulabchand told CNBC-TV18.

Since it takes one year for the rate cut to have an impact, atleast a 200 bps rate cut was needed to revive the capex cycle, he explained.

In the past few years, Gulabchand's company has delivered several iconic projects, including India's first metro network in Kolkata, the Mumbai-Pune expressway and the Bandra-Worli sea link — a clear engineering feat. His dream project Lavasa Corportion (a subsidiary of HCC), a hill city closed to Pune, however has not been as lucky. HCC has been trying to raise money by listing Lavasa on the exchanges. Despite the Securities and Exchange Board of India (Sebi) clearing the documents for Lavasa’s maiden public issue to raise Rs 750 crore in November last year, the IPO still eludes the market.

When asked if investors can expect Lavasa IPO by the end of this fiscal, Gulabchand said the situation is too volatile to commit about the possibilites right now.

Meanwhile, Gulabchand hopes for "a lot more ease of doing business," and quicker payment by the government for its projects.

Below is the transcript of Ajit Gulabchand's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.


Sonia: Will yesterday's move have a meaningful impact at all? Will the capex cycle pick up due to the lower interest rate scenario or do you think that low demand will continue to be a hurdle?


A: Any kind of rate cut at this time is welcome. However, the rate cut that we got yesterday is woefully insufficient. So this announcement has been quite disappointing.


The brick and mortar industry of this country has been almost at a standstill for the past several years and is suffering with an overburden of debt and high interest rates. It needs a substantial cut, I would have expected at least 300 bps but if not that, 200 bps as an initial cut to create the impact that is necessary. It is very important that we give this signal and at the end of this, we saw in last three years, it is already very late and what has been announced is very little.


So it must be remembered again that the monetary policy effects takes time to take place. So this meagre cut in interest rate is still going to take some time to take effect and particularly in a country like India where more than half the country is outside the banking system, interest rise has to be drastic and cuts have to be drastic. So I think it was very disappointing to note that we have missed yet another opportunity to give the right kind of impactful energy back to the industry.


Latha: A lot has been expected from the government in terms of expenditure on roads in particular, the budget indicated that roads and railways is a place where the government will invest. How have the last six months been, have the order books improved for you?


A: We were talking about rate cuts. That is one thing. However, should the government be doing more? Certainly.


There are three things that the government needs to focus on with great urgency and great vigour. One is cleaning up the street where everybody is stuck because of liquidity, government departments not paying up there, the money that is due, there are several such hassles that are coming in the way. They must take a view and quickly clean up that.


Second is they must bring about a heavy expenditure in infrastructure because only government can do that, private sector this time is not going to come forth in a big way to invest in infrastructure because it does not have either equity support nor the banking support.


Third is that there must be some basic reforms that make ease of doing business possible. All these are on the agenda of the government but they are taking too long to happen, too slow to happen. This also needs to be done but just because that is delayed a bit, does not mean that the interest cut rates are okay, they are insufficient and disappointing.


Sonia: Since we have only a 50 bps rate cut to work with as of now, can you tell us what the impact would be on your own books because HCC pays about Rs 170 crore of interest per quarter, how much will your own interest per quarter come down because of the cumulative rate cuts we have got till now?


A: Most of these rate cuts are not yet transferred to the industry. So when I get to know what exactly is the rate cut that will come, which will be fairly small, I will be able to tell you that.


Latha: The total interest rate cut by State Bank of India (SBI) -- that is one quarter of the banking system -- is 70 bps, so they have passed on somewhat?


A: Till we receive that letter, I don’t know what they are doing with the infrastructure industry, construction industry. Let us answer that question when it comes to that.


The other thing you asked me, yes the government has started spending on roads, it is now likely to come up with a big expenditure budget for railways but it is still not fully happened. So I think we are waiting for that and we are very clear that it is going to happen. I would like to request the government to make it faster than that. It is not an easy task but they still will have to do it because the economy is suffering at the moment at least the brick and mortar economy is.


Sonia: Realistically how long do you think it could take for the capex cycle to pick up?


A: As long as the internal rate of return (IRRs) required for entering a new business or a new project is 20 percent and above, it will take a very long time. The moment this interest rate comes down by 300-400 bps, you will find a surge of investment happening that would take up very fast. It would take still a year for any big rate cut to have an effect but it will have a buoyancy effect, which will make people turn around and look at the issues and start looking at investment as a serious possibility not as a future possibility.


Latha: Is there any improvement in the other administrative points where projects were getting stuck, are environmental clearances, National Highways Authority of India's (NHAI) repayments quicker?


A: They are still not able to pay the people, their arbitration awards which are there, they go on challenging it and nothing comes out of it for years. It takes six-seven years to get your money which puts a huge interest burden on the company and pressure on the banks. It is being resolved. I know that there is a process being put into place but it will take some time for that to happen.


As far as other areas are concerned, there are many obstacles, far too many regulations, the company law even after amendment continues to be a major pain, most companies at a smaller level are moving to limit liability partnerships. So there is a lot more ease of doing business issues that need to be tackled. Are they going to do it? Yes, they have announced, they will do it, some of them have begun but a critical mass of the changes has yet to happen for the impact to be felt.


Sonia: Any update on when the Lavasa IPO can take place? The last time when we spoke with your management, they indicated that till November they would still consider it, anything on the anvil?


A: At the moment, we have nothing. Just now no decision has been made. Let us watch the stock market. You saw what happens to the stock market through the year. On the infrastructure side it hasn’t improved and we were expecting things will move up in April-March when we did our qualitative institutional placement (QIP) for HCC, after that things have not worked very well for the infrastructure industry. Therefore, we will wait and watch on that subject. We are out to raise money and we have to raise them quickly and we will go ahead with that.


Latha: It would be in this financial year you think by March 31?

A: Let us see. I cannot say. The situation and the volatility is such that it is very difficult to make a positive prediction or a positive comment that this will happen by this date.

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