Cost of money has increased by 150-200 bps says SREI Infra

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Hemant Kanoria, chairman and managing director, SREI Infrastructure in an interview to CNBC-TV18 spoke about the company's tax saving bonds issue, which is open for subscription.

It aims to garner Rs 300 crore through the first tranche of the issue. The company would come out with the second tranche and subsequent issues, if it receives good response for the first tranche.

Since the interest rates have been rising throughout the year, cost of money for SREI has increased by 150-200 bps. "If we see a decline in interest rates, we still have 2-2.5 months to go for that, then our average cost will get adjusted to that minor in extent," he added. 

Below is the edited transcript of Kanoria's interview with Latha Venkatesh and Sonia Shenoy of CNBC-TV18. Also watch the accompanying video.

Q: You have a tax saving bond issue open. Can you give us details - what it will cost you and how much it will earn investors?

A: We are issuing these tax free bonds for the first time from our company. Though as an IFC which we got registered last year with RBI in March, we were allowed to raise infrastructure tax free bonds for financing the infrastructure sector. But, we were see interest rates stabilize and it is more towards the closure of the financial year that people start the investment. That is why we though that this is an appropriate time to go ahead with it.

Returns are quite good because they get 9% plus return and it's tax free. So to the amount of Rs 20,000 is very small. We have already requested the government to think that whether this can be increased the limits from Rs 20,000 to Rs 2 lakh. But nevertheless at present we have launched with Rs 20,000 and we'll see what the response is. If the response is good then we can come out with a second tranche and subsequent issues too.

Q: Compared to FY11 how much has the cost of money gone up for you in FY12?

A: Compared to 2010-11, this year the cost has definitely gone up by close to about 150-200 basis points, vis-a-vis what it was in the previous year. Once we close the year in March then we will know, because now what we understand since the last credit policy of the RBI is that the interest rates are not increasing. If we see there is a decline in interest rates which start off, we still have 2-2.5 months to go, then our average cost will get adjusted to that minor in extent. But, it is very difficult to hazard a guess at this juncture.

Q: Have you been able to pass on this entire increase or are you faced with narrow margins for the company?

A: No, actually we do pass on the interest cost to the clients because that is basically in our agreements. But realistically, there is always a time lag and last year that is 2011, the interest rates have been going up successively. Therefore, it becomes very difficult to continuously keep on passing to the clients some brunt you also have to take.

So, definitely to a certain extent the profitability will get adjusted but the pressure is not because of the interest rate that much as it was more on the foreign currency. We have ECB loans and last two quarters we had to take MTM loss because of rapid depreciation of the rupee against the dollars.

As we have seen in the last four-five days the rupee has started appreciating against the dollar. So, we don't know how it will close in March and whether we will be able to recover some of the MTM losses which we have provided in the previous two quarters.

Q: How the dollar loans are expected to impact you P&L in Q3 and Q4?

A: Our repayments are spread over a period of ten years. Though we are taking a MTM loss as a provision, but actually we don't see we'll be having losses because the repayments are in various tranches spread over 10 years. It is a long period and our loans are not that high compared to the total portfolio that we have.

Out of the total portfolio around 10-12% would be foreign currency loans. Out of that a certain percentage would be only open, otherwise the balance is all hedged. Wherever it did not make sense to hedge it because the costs were high for a long time, for a longer period to those are the only open positions. We have a very conservative policy on our both foreign currency open positions and all the hedging that we do.

Q: Any of the dollars are due for repayment in 2012 and are you hedged for it?

A: There would be some small tranches which should be due in February-March. I don't recall it exactly, but there would be some small tranches. There is nothing major which is there because the loan would be repaid over 10 years.

Q: REC pays the same interest as your bonds do and it is a semi government body. Don't you think investors will prefer REC over you?

A: No, basically the market is quite large. I don't see that just one company would be in a position to mop up everything. Our tranche is small at Rs 300 crore. So I don't see that to be a big problem.