Hailing Reserve Bank of India’s move to slash repo rates by 25 bps KK Mohanty, MD, Gammon Infrastructure said the company is likely to benefit by Rs 100 crore post this hike. "We have more than Rs 5,000 crore debt in consolidated balance sheet. In that 25 percent bps effectively should give around Rs 100 crore benefit provided that reduction is passed on to us," he added.
In an interview to CNBC-TV18, Mohanty said government should tackle issue of ease of doing business. He further said that the cost of funds is a critical aspect to make industry globally competitive. The company is on the verge of completing three projects and has operational assets worth Rs 2,500 crore.
Below is verbatim transcript of the interview:
Q: How much relief will 25 bps cut give you, what is your current debt and how much interest payments do you expect on a quarterly basis?
A: We have more than Rs 5,000 crore debt in consolidated balance sheet. In that 25 percent bps effectively should give around Rs 100 crore benefit provided that reduction is passed on to us.
I will make two points here, the banks also have limitations. The projects that are stopped, they will not jump on it and give you interest rate reduction because those projects are anyways stopped and their portfolio is suffering.
Secondly, today because the infrastructure portfolio is not exactly performing well, the risk premium of the bank is also high on the infrastructure project. Due to risk premium, if they have 25 percent cushion in the cost of fund, they will try to increase 25 bps into the risk premium.
The industry or the infrastructure segment may not immediately enjoy a lot of benefit but this is exceedingly positive move and people are looking with optimism for future, it is a direction shown to the whole financial policy and RBI approach for the future.
Besides two critical things which RBI is focusing on - one is fiscal deficit and inflation. The central bank should also push the government on ease of doing business and taking faster decisions in public sectors so that the public sector is also performing along with the private sector.
Once the portfolio starts performing, if the infrastructure starts performing, today if the bank is charging 200 bps risk premium on the base rate, that risk premium will start coming down once the portfolio starts performing. Besides RBI cutting rate, the other side the performance itself also can bring down the cost of fund in the whole industry.
Q: I have a slightly longer-term question then, it looks like there are going to be three-four more rate cuts this year and it finally looks like there are some green shoots in economy as well, do you get a sense that the next financial year or maybe the one after that is going to be the real turning point for infrastructure companies?
A: As far as infrastructure interest rate is concerned, there is a long way to go. At double-digit interest rate, infrastructure cannot be sustainable especially in public private partnership (PPP) route in any country. So the first step will be to bring it down to single digit. We being the industry players expect that within one to one-and-a half-year’s time span.
Today, I am not talking about the RBI bank rate, the effective rate to the customer today is around 11.5-12 percent. It has to come down to 100-150 bps within a span of one to one and a half years. Then we have to again see how it can come down further to be more competitive with the global markets.
We have a long journey as far as the interest rate is concerned but no doubt for a PPP business, cost of fund will be one critical aspect to make the industry competitive and they can get into the global platform to compete.
Q: You spoke about your debt figure at Rs 5,000 crore. Has it increased on a sequential basis from the last time we spoke to you?
A: No, I don’t have the exact number today but we have operational assets of nearly Rs 2,500 crore and non-operational under construction assets of around more than Rs 2,500 crore. So operational assets goes into these debt figures are consolidated figures. These are the figures otherwise and the HoldCo if you see there will be very little debt because there is no leveraging at the HoldCo level.
All the leveraging or debt funding is in to the SPV level which is at the project level. So overall if you see, the Gammon Infrastructure by itself will not have much of a debt because they don’t have any direct cash flows. These projects are implemented on a bankruptcy remote model so every project is a separate SPV like a separate company.
Q: How is business shaping up, how many additional projects do you think will contribute to your revenues next financial year and what kind of topline guidance would you have?
A: We are presently on the verge of completing few more projects achieving COD, one is Hajipur-Muzaffarpur, which is annuity project.
The second project is Rajahmundry Godavari Bridge which is in Andhra Pradesh, which is nearly 97-98 percent complete. These projects are on track today, next 45-60 days time they will achieve the COD. That will add almost around another Rs 500-600 crore to our topline and it will relieve a lot of stress into the whole cashflow systems.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
