Friday, October 17, 2008

Infrastructure Sector Faces Capital Crunch - Oct 17, 2008

The infrastructure sector in India has finally started to feel the heat of the slowdown. Although India''s top engineering firm L&T posted a 31 per cent rise in the quarterly net profit, a disappointed market pushed its stock down more than 11 per cent on Oct 15. The company, however, said that it will reach its annual targets. L&T is not the only company which is seeing lower margins. State-run BHEL is also facing raw material pressures and for it, too, margin growth would be a challenge.

Moreover, most infrastructure firms operate at a debt of 60 per cent. Now, with the cost of debt rising nearly 2 per cent, earnings are evidently under pressure. The sentiment in the stock has slipped significantly, with shares of BHEL sliding 17 per cent in one month, L&T declining 30 per cent and Crompton dipping 12 per cent.

India Inc is now worried about new projects and new businesses. The investment cycle is threatened and fresh working capital has become expensive. This implies that from now on corporate India would have slower its pace when it cones to new businesses.

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