Business Today

Ready for recovery

How much you gain from the recovery will depend on two things—the strength and shape of the revival and your company’s deeds during the downturn.

Rishi Joshi | Print Edition: November 15, 2009

The beat of the economic recovery has brought a smile on the lips of everybody— from consumers to businessmen and policymakers. But there is the occasional stab of anxiousness in the heart, or a missed heartbeat, when the mind asks: Is this for real?

Look at the stunning rebound in the index of industrial production, a 10-fold rise in the growth rate—from 1.1 per cent in April to 10.4 per cent in August. Check out the legions of companies reporting definitive upticks in sales and profits. Did you hear that so and so companies are thawing investment plans and recruiting all over again? You bet the recovery is real, and that all this seems to be indicating is that the government’s fiscal stimulus has worked in stoking consumer spending and corporate investment.

Green Shoots Turn into Stalks...
Industrial production growth has jumped dramatically, but may subside a bit in the coming months.
Jan 09: 1.0
Feb 09: 0.2
March 09: 0.3
April 09: 1.1
May 09: 2.2
June 09: 8.2
July 09: 6.8
Aug 09: 10.4
Figures in per cent for IIP growth

But every company that has weathered the storm so far has to confront a far more critical question: Will the recovery benefit it as much as it would its competitor? The answer to this question — which could dramatically change market shares and alter the corporate landscape — depends on what the companies did during the downturn. The harvest of recovery is not going to be equally good for all.

Good harvests will be claimed by companies that not only understand the shape and speed of the unfolding recovery better than the rest, but also did the “right” things during the downturn. Did they take cover in the trenches or charge into new territories? Did they use the opportunity to become lean and mean?

The 2009 edition of BT 500, an annual performance barometer of over 1,000 listed companies, has some pointers to these. See how Maruti Suzuki and Hero Honda Motors have done a pole-vault in market capitalisation, Maruti from #34 to #18, Hero Honda from #48 to #20.

But first some pointers to the strength of the recovery itself. India’s Gross Domestic Product (GDP) growth for the June quarter (Q1) was 6.1 per cent, up from 5.8 per cent the previous quarter. This recovery was largely driven by the manufacturing sector, which seems to be stirring back to life, partly a consequence of the stimulus package.

Says Mahesh Vyas, MD & CEO, Centre for Monitoring Indian Economy (CMIE): “Though fiscal stimulus helped, too, RBI’s reversal of its tight money supply policy has played a more important role in getting the economy back on track.” In a recent review, CMIE found finances of most companies to be sound, profit margins set to rise and sales growth likely to pick up. Vyas feels that the investment boom, which had subsided a bit in the first half of this year, is already showing signs of recovery. His estimates show that projects worth Rs 3 lakh crore are scheduled to be commissioned between October 2009 and March 2010—almost three times the Rs 1.3 lakh crore worth of projects that were commissioned between April and September 2009. Says M.S. Unnikrishnan, MD & CEO of engineering major Thermax: “Our order book has already started improving. We have also started to get plenty of enquiries from prospective customers for future projects across sectors like cement and steel.”

...And Corporate Score Sheet Looks Promising
Production and sales in key industries are rising healthily.
Profits are growing faster than sales, indicating that cost cuts are at work more than revenue growth.
Cost reductions alone, though, won’t sustain the rise in profit.
Continued revival in consumer spending and government stimulus should rekindle revenue growth.
Inflation, exchange rate, fiscal deficit and uncertainty of global recovery are the key risk factors.

So, will the economy soon return to its high growth rates of 9 per cent? Most analysts concur that might not happen in a hurry. Points out Rajiv Kumar, Director & Chief Executive, ICRIER: “The recovery is still fragile and is only likely to take hold in the next financial year.”

Why? Because though industry seems to have responded well to the fiscal and monetary measures, there are areas of the economy where the influence of government—or even domestic consumers—is very weak. For instance, trade. Exports had plunged into the territory of negative growth in October 2008 and haven’t recovered yet. That means India’s exports have been shrinking for the past one year. With western economies less sure of the shape of recovery (there have been talk of J, L or W-shaped recovery), major markets for India’s exports aren’t going to start generating big demand soon. Agriculture—still making up about one-fifth of the economy—will also register a negative growth in 2009-10, for the second consecutive year. Overall, the GDP growth for 2009-10 will touch 6 per cent, with prospects of a higher growth in 2010-11.

Then there is also a question mark on how much of economic stimulus is enough, beyond which it could start hurting the recovery itself. For instance, if inflation spikes due to easy money environment, interest rates will have to be hiked to keep the price line in check. Higher interest rates could take some steam out of the big investments being planned.

Says Ajit Ranade, Chief Economist, Aditya Birla Group: “We are fairly sure an industrial revival is underway. The question is only how to sustain or accelerate it.”

So the recovery is certain, the speed and shape of it isn’t. How and who—among India Inc.—makes most of the recovery? BT applied some filters to the vast universe of companies, sifted through data and spoke to top analysts. The result: A shortlist of seven companies whose readiness for recovery is explained between pages 46 and 60. Some of them are already reaping the benefits of their strategic initiatives. Infosys, for instance, focussed on sustaining its high margins to allow it to spare more cash for growth initiatives when the tide turns. Now in a better business environment, it’s scaling up operations, again focussing on high margin-businesses.

Sound finances of industry till March 2009.
Healthy profit margin.
Strong demand growth expected.
Investment pipeline robust.
400 projects worth Rs 1.3 lakh crore commissioned in Apr.-Sept. ‘09.
Rs 3 lakh crore investment likely between Oct.-Mar. ‘10.

“Our model has proved to be resolute,” said Infosys’ MD& CEO S. ‘Kris’ Gopalakrishnan. “Clients are making some decisions, especially in mergers and acquisitions.”

Or take boiler major Thermax. It diversified into new business categories, which has given a fillip to its order book.

In fast-moving consumer goods, Godrej Consumer Products Ltd (GCPL) ramped up advertising and promotion expenditure to ensure high visibility for its brands and managed to increase its market share in soaps and hair colour by focussing on the main brands.

“Our philosophy has been to win brand loyalty during hard times. We have built relationships with consumers during hard times and we are confident that they will stay on with us during the good times as well,” says Dalip Sehgal, MD, GCPL.

Maruti went about increasing market share without getting into a funk. “We did not lose focus on our long-term goals during the slowdown. We wanted to convert the downturn into an opportunity,” says Ajay Seth, CFO, Maruti Suzuki.

By the time this issue hits the stands, most companies will have announced their results and we will have more stories of survival—and failure. The times are hard and, in the world’s major economies, those who see green shoots are still treated with scepticism. So, just doing well in Q2 will not guarantee a passport to a good future: Storms can remove familiar landmarks and create new ones. Every company will have to adapt and learn fast.

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