August 5, 2011:
For the first time in history, ratings agency Standard & Poor's downgrades the United States credit rating
. The world is shocked. Global financial markets are in turmoil. In Mumbai, the Bombay Stock Exchange's Sensex hits a 14-month low of 16,990.
"The prospects of a double-dip recession now seem very real. The quick fixes, the massive stimulus packages, the QE1, the QE2 and now perhaps a QE3 are beginning to seem more like band-aids used to fix a leaking roof in a tropical storm. The fiscal measures that were needed and were appropriate to resolve the problems in 2008, suddenly seem either unsustainable, or just not up to the task," Kumar Mangalam Birla, Chairman, Aditya Birla Group, said at the JRD Tata Memorial Lecture at ASSOCHAM on August 11. (QE1and QE2 refer to the quantitative easing steps taken by the US government to shore up the economy during and after the 2008/09 downturn; QE3 to the fresh one being considered.) Even in India, growth could be halted if there was renewed recession in the West, he said.
"I cannot think of such a bad time in the last few decades," K.V. Kamath, Chairman of India's second largest lender, ICICI Bank, told BT. Kamath was referring to yields on the US 10-year treasury bonds dropping to below two per cent. The biggest worry for companies in the postdowngrade world is fund raising.Global economic crisis: How will India fare?
Money costs more now - the risk perception has worsened. With the outlook for the global economy worsening, operating risks have become higher, says Rahul Bhasin, Managing Partner, Barring Private Equity Partners. Yet, the Rs 2500-crore GVK Group, for one, is unperturbed. "We see this as a time to look for opportunities to grow," G. V. Krishna Reddy, the 72-year-old founder and chairman of Hyderabad headquartered group told Business Today
. At the time of going to press, while GVK would not comment, it was learnt to be negotiating a deal for acquiring coal mines in Australia, a strategy to grow its energy business through backward integration.
To fund the acquisition, the company is reportedly in the market for raising over a billion-dollar loan. GVK Power & Infrastructure Chief Financial Officer Issac A. George will not comment on the loan, but offers a tip for borrowers: "Even after factoring in the hedging costs including the fluctuations in foreign exchange rates and LIBOR, the dollar remains a cheaper currency for raising debt compared to the rupee." (LIBOR stands for London Interbank Offered Rate.)
G.V. Krishna Reddy
G.V. Krishna Reddy
Founder and Chairman, GVK Group
Look for: Growth Opportunities. Distress sales which could be coming into the market with businesses under pressure. Companies such as GVK can expect to buy reasonably priced assets. The last 12 to 18 months have seen as many as 20 to 25 bidders for some road projects, as against six to seven two years ago. Many contractors-turned-developers might be forced to sell cheap now as they had probably bid at unrealistic internal rate of returns
Go for: The dollar is still a cheaper currency than the rupee for raising debt, even after factoring in all the hedging costs (foreign exchange and LIBOR fl uctuations)
Managing Partner, Baring Private Equity Partners
Aim for: This is not the time to look for cheap capital because the risk premiums are high. This is the time to become more competitive
Look for: Do not manufacture in India what you can source from, say, a factory operating at 20 per cent in the United States. Machine tools companies may be up at cheap valuations in countries such as Germany. Do the labour intensive work here. Japanese companies are fi nding it hard due to labour shortages
Change for: Involve the staff that is closer to your customers in decision making or delegate decision-making powers to them unless top management deals directly with clients
Watch out for: Credit in the global market will shrink as the credit adequacy ratios banks need to maintain will rise; profi tability of these banks will fall. So expect more NPAs and more downgrades
Aim for: This is the time to turn fi xed salaries into variable pays
Look for: This is an opportunity to pick up good talent from overseas to bridge the skill gap, be it for home operations or overseas expansions
Watch out for: Keep your head a bit because last time [the post-Lehman collapse in 2008] some companies reacted too quickly and too much for which many employees did not forgive them when the economy rebounded. These companies couldn't hire back the talent they had lost when they wanted them back. Some companies lost all organisational memory
Chairman, Edelweiss Group
Aim for: This is not a good environment to raise equity and debt is also becoming costly so companies are focusing on becoming more effi cient
Wait for: In fi ve or six months there will be a lot of M&As; tired of the high interest rates many companies will come on the block as their margins are stretched. This is true for companies across the board, especially in the capital goods and infrastructure sectors. At the moment some private equity deals are going through in the infrastructure sector
Chairman, Aditya Birla Group
Hedge for: Commodity prices will broadly continue to be volatile
Plan for: Oil prices can be expected to fl uctuate around a range that is around 20 per cent higher than it is now
Watch out for: The US dollar will cede some ground to a mix of the yuan and the euro in the next three to five years
*Excerpted from the J.R.D Tata memorial lecture at ASSOCHAM on August 11, 2011
"I find many companies do not have clarity yet on what has hit them, but for a vague idea about increased uncertainty," says Bhasin. But, as Reddy says, there are upsides to the downturn for the courageous. For growth seekers such as GVK, Edelweiss Group Chairman Rashesh Shah predicts that a number of merger and acquisition, or M&A, targets will soon be up for grabs. "Many companies, which are tired of high interest rates, will be on the block in five to six months as their margins are stretched," he says. This is true, he says, for companies across sectors, but especially for capital goods and infrastructure.
So this could be the time to shop for distress assets in places like Europe. Talent will be available too. Sectors hit by India's skills deficit might find the slowdown a dream come true. Manish Sabharwal, Chairman of people supply chain TeamLease, says a number of companies have begun to bring in highquality and super-specialised talent from overseas - the kind they always eyed but could not afford before. He cites examples of Bosche, Educomp and Angsana Spa that have hired teachers, trainers and engineers from overseas. Less aggressive entrepreneurs can leverage the slowdown to lower costs - by sourcing from European or American companies which are being forced to operate at low capacities owing to inadequate demand. Says Sunam Sarkar, CFO and Executive Director, Apollo Tyres: "It might be cheaper to import machine tools from Germany and building material from factories in the US that are all probably operating at 20 per cent of their capacities."
Additional reporting by E. Kumar Sharma