The Hindu Business Line : Market View

... the question to ask (after interest rate hike) is how higher costs of borrowing would begin to impact profit margins and expansion plans of the corporate sector. It is important to look for revenue growth in high fixed cost businesses, and margin growth in highly leveraged businesses. Businesses that have higher levels of borrowed funds would find the debt service burden increasing and find it tougher to borrow.

The debt-service ratio for many businesses is low; the average for the top 500 companies being 0.59. Most companies are cash-rich and have used equity rather than debt for capacity expansion. Businesses such as IT that have higher operating leverage, usually have a low or nil financial leverage. If one is looking at sectors that have both kinds of leverage, and also operate in competitive environment that makes pricing tough, they will be hurt the most, airline businesses being a good example.

Optimix

The steady increase in domestic as well as global interest rates along with dull equity markets could have a lag effect on borrowing costs of companies. Under the circumstances, large companies may be in a position to raise resources at more favourable terms. Such companies, especially those in sectors with healthy coffers and operational cash flows (such as IT and FMCG) appear better placed to weather risks from rising domestic interest rates.

Franklin Templeton Investments

India stands at a very sweet spot due to its favourable demographics, which will help it sustain the domestic demand (67 per cent of GDP) for many years to come. Also, large contribution of the services sector to the overall GDP reduces the volatility significantly and lowers the risk of slowdown, if any. All this makes it a nation that is least affected by global slowdown, which is attracting investors to India even in the midst of this uncertainty. The markets may take cues from global developments and would keenly watch the interest rates, globally and locally along with foreign flows.

We believe that in the finals of the game of equity investing, the score will be disciplined investors three and traders 0. Investors need to have a long-term view on equity and invest through the SIP route to benefit from the volatility of the markets.

Kotak Mutual

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