Interest rate hike will not deter capex easily: Experts

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Interest rate hike will not deter capex easily: Experts

In an interview with CNBC-TV18, MM Miyajiwala, Executive Vice President & Chief Financial Officer of Voltas and Subba Rao, Group Chief Financial Officer of GMR Infrastructure, discuss their views on capital expenditure programmes.

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Excerpts from Markets Midday on CNBC-TV18 Watch the full show » RELATED NEWS Jan IIP growth at 16.7% vs 1% (YoY); RBI action inevitable Voltas BSE | NSE 29/05/12 Are Mutual Funds betting on Voltas? Other Stocks in this news GMR Infrastructure |

Industrial growth for the month of January came in at 16.7% as against 1% in January 2009. While the manufacturing sector rose to 17.9% versus 1% on year-on-year basis, the mining sector growth was recorded at 14.6% as against 0.7% in the corresponding month of 2009.

In an interview with CNBC-TV18, MM Miyajiwala, Executive Vice President & Chief Financial Officer of Voltas and A Subba Rao, Group Chief Financial Officer of GMR Infrastructure , discuss their views on capital expenditure programmes.

Below is a verbatim transcript of an exclusive interview with MM Miyajiwala and A Subba Rao on CNBC-TV18. Also watch the accompanying video.

Q: Your thoughts first on the two sectors in which you are in. Consumer durables and capital goods are up 31% and 56.6% respectively. What has led to this quantum leap in capital goods? Is the capex cycle really sourced wrong from what you get in terms of calls for tenders and bids?

Miyajiwala: For the last six-nine months the data, which has been coming in, has been very strong. The Budget also in February was extremely good. It has yet to have an impact on the IIP numbers to be declared in future. The sentiment has improved very significantly. We see on the ground people looking at more capital expenditure and even our material handling business, which having a low pick of has started improving very significantly in the last few months.

For consumer durables there is a demand which has come back. There is a feeling of well being. People are looking with a lot of optimism to the future. Therefore, people have probably started looking at revising their forecast for the future and accordingly planning for the expansion.

Q: If you look at the index number itself capital goods have indicated almost a 60% jump from their September levels. Are you seeing that much of a growth in the capex cycle?

Rao: I think there is a secular growth in all the sectors. The credit growth has been going up. All the sectors have been doing well. This leads to investment, fresh investments. People have been dusting off the shelves and taking out their blue prints and they are going back to the grounds to set up new capacities.

Infrastructure has been gaining a lot of momentum with the new road projects being announced. A lot of capital has been raised and people are investing this capital in the power sector. So these two sectors are seeing significant growth in the infrastructure. Hence, we would see the good times to continue for long time.

Q: What about interest rates? It is inevitable that if this is the pace of growth even irrespective of what the RBI does you are going to see money getting costlier. Will that alter this capex cycle at all if the cost of funds say for a company like yours went up by half or one percent?

Rao: The interest rates might go up in a span of about six months but it would be marginal increase about 50 basis points it might go up by 25-50 basis points. Everybody has discounted it already. I do not think that will significantly impact the capex programmes of the industry.

Q: There are two things that will continue or come up when growth is so strong. One will be of course the fact that money is going to get costlier. How much do you think it can get costlier at your end? Inflation is standing very close to 8%. How are these likely to disturb the capex cycle at all?

Miyajiwala: If there is a very significant increase or hike in the interest rates it could impact growth negatively. The demand and sentiment is so strong that a little bit of increase in interest rates is not going to deter people from incurring from fresh capital expenditure. So unless there is a very sharp increase in interest rates, I do no think it is going to impact the investment climate.

As far as inflation is concerned, it is a major concern. In the past the inflation has been primarily driven from the supply end and if the demand push also starts putting pressure on inflation, then there could be a factor to worry about.

Q: Do you see any thing breaking the consumption cycle, which has been growing at 31%? Is that a sustainable rate?

Miyajiwala: The recent past is even more than 31% in practice, which will get reflected in the IIP numbers to be declared in future. So it is so strong at the moment that a little bit here and there is not rally going to impact the sentiment.