Industry says not the best time to expand

Tags: News

Steel, infra companies find cost of funds too high, explore other avenues for working capital

Fewer project announcements by companies in the metals and infrastructure segments over the past two years due to the uncertain economic environment led to lower offtake of bank credit this year. Where companies are raising funds for capital expenditure — mainly brownfield expansions — it is being done through other cost-effective routes as bank credit is seen as expensive.

C S Verma, chairman of SAIL, said: “We recently raised funds (around Rs 600 crore) to repay costly debt through commercial papers, as we found it to be more cost-effective. We require more funds for our expansion and modernisation, but have not yet decided as to when we will raise it and though which route.” However, he said getting loans from banks is never an issue for the company.

A senior official from Hindalco Industries said, “Over the past two years, no big project has been announced by any large company in the country. They are mainly focusing on projects announced earlier or executing the one that they have already started.”

The official said there were various reasons why companies are going slow on new projects, as the entire environment in the country at the moment does not support the idea of going for new projects.

“There are issues with land, water and availability of resources and raw material. Further, demand is also on the lower side due to economic slowdown. Altogether the environment is not apt for new projects to come up.”

Expressing similar view, a senior official from Posco India said, “Companies will take funds from banks when projects kick off. There are so many issues involved with the clearances to get a project to start that companies are getting stuck, and are not approaching banks for fresh funds. The regulatory reg­ime is not favourable for projects in the country. Also, banks have become very selective in lending funds.”

South Korean steel firm Posco is struggling to construct its Rs 52,000 crore project in Odhisa for the past several years, as it has not been able to get the land for the project due to opposition by land owners. Posco had signed a memorandum of understanding (MoU) with the state government on June 22, 2005 for setting up an integrated steel plant at Paradip with a capacity of 12 million tonnes per annum. A clearance was given to the company last year on certain conditions, one of which requires it to ensure tribal rights and compensatory afforestation. Posco is also liable to bear the cost of regeneration of an equivalent amount of open and degraded land in a district to be determined and indicated by the state government.

Seshagiri Rao, joint managing director and group chief financial officer of JSW Steel, said overall there is a liquidity shortage and small and medium enterprises are facing huge difficulty in raising funds. Also, no new project is coming up because of which the credit offtake is getting impacted.

Rao said banks are saying that they have excess liquidity for lending, while they are taking around Rs 1 lakh crore loan from Reserve Bank of India everyday.

JSW group, which operates in sectors like energy, infrastructure and steel, raised around Rs 500 crore for capital expenditure this year from aboard. “We found the rate of interest lower overseas, so we didn’t raise it from the domestic market,” said Rao.

In the infrastructure sector also, there are delays in project execution and high cost of borrowing from banks is keeping companies away.

Hemant Kanoria, chairman and managing director of Srei Infrastructure Finance, said: “Companies are finding interest rates high at banks and are raising funds through other routes. Also, the government should streamline and fast-track infrastructure projects that it has announced. If there is no project execution, why will companies raise funds?”

Unless the government streamlines project clearance and brings in clearer norms for sectors like power and mining, the growth will continue to be slow, said Kanoria.

The story is a little different for real estate players. The sector is struggling to get funds for projects and repaying high-cost debt, but banks are sceptical about lending to the sector due to several scams reported in the past.

Rajeev Talwar, managing director of DLF, said banks are wary of lending to developers and it has become difficult to raise funds at interest rates of around 13-15 per cent. So, companies are looking to other avenues of fund raising. The country’s largest developer is not planning to raise any fund in the near future. Instead it is offloading land parcels and non-core businesses to repay high-cost debt.

Godrej Properties is in the process of raising Rs 300 crore through fixed deposits to repay high-cost debt. Typically, banks charge higher interest rates on loans to realty companies, though Godrej Properties has benefited from the image of the group and its relationship with bankers by way of easier access and preferential rates of interest.


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