Sunday, April 5, 2015

Those that lose from rate cuts

Cash-rich MNCs and PSUs will earn less interest income
Those that lose from rate cutsWhile lower interest rates are good for consumers and companies that have borrowed heavily, those sitting on a large cash pile will be an unhappy lot.
Companies that invest their surplus cash in debt instruments such as fixed deposits and non-convertible debentures may see their interest income fall with a cut in interest rates. The RBI has effected only a 50 basis point cut in policy rates, but the yield on the benchmark 10-year Government bond has declined by over 80 basis points in the last six months. Likewise, the yield on the 10-year AAA rated corporate bond has fallen by almost 100 basis points during this period.
So, which are the cash-rich companies that will see their investment income shrink, with a fall in interest rates? Indian subsidiaries of multinationals that have significant cash reserves and do not have any major capex plans may see a marked decline in their interest income. For instance, drug maker Novartis India earned interest income of ₹81 crore in 2013-14, which constituted over three-fourths of the company’s pre-tax profit.
A further fall in interest rates may lower the interest income earned by the company.
Similarly, interest income accounted for over half of engineering major Ingersoll-Rand India’s pre-tax profit in 2013-14.
Similar to MNCs, PSUs such as Coal India, MMTC and NBCC, which have significant cash reserves and earn a sizeable portion of their profits by merely investing the cash surplus, may have to bear the brunt of falling interest rates. Take MMTC, for instance; interest income accounted for over three-fourths of its pre-tax profit.
Likewise, for Coal India which held massive cash reserves in excess of ₹52,000 crore as of March 2014, interest income accounted for almost a fourth of its operating profit in 2013-14.
Given the huge cash in its books, the company’s interest income can moderate with a reduction in interest rates by banks.

No comments:

Post a Comment