Time for India Inc to get aggressive

To say coronavirus dealt a body-blow to India Inc in the first quarter of this fiscal is an understatement. Having triggered one of the world’s most stringent lockdowns, the pandemic rendered the well crafted business plans of various companies useless. No company can plan for a sudden 23.9 per cent shrinkage in the Indian economy and, not surprisingly, the books of almost all companies were splashed deep in red.

After the complete washout in the first three months of the fiscal, expectations ran low for the second quarter. As the lockdown was lifted in stages across the country, companies faced significant supply-side challenges in restarting their operations. Demand outlook wasn’t rosy either. Hit by job loss and pay cut, consumer confidence was at its lowest — especially in the urban centres. This had a direct bearing on demand which was, understandably, slow to pick-up. But when the companies announced their Q2 results, they surprised everyone.

Analysis of 3,827 listed companies by this newspaper revealed that revenues grew by 37 per cent in Q2 vis-a-vis Q1 (on a sequential basis) and on a year-on-year basis it declined by just 6.7 per cent. Nothing surprising here. As the economy opened up, demand returned and topline recovered. What stumped analysts and others tracking corporate performance was the profit number. It jumped by 470 per cent sequentially and 39 per cent on a year-on-year basis.

Left with an uncertain demand outlook and low capacity utilisation levels, companies attacked what was in their control — costs. Aggregate operating profit rose by as much as 42 per cent in Q2 compared to the earlier quarter as operating margins improved by three per cent. This came about due to lower raw material cost, aided by fall in global commodity prices. Significant savings in power, fuel and freight costs were also achieved as the companies rationalised their output and distribution.

For instance, cement players saved a lot on freight by moving their goods by rail (yes, rakes were available) rather than by road. Advertising expenses were also trimmed and in some cases, slashed. FMCG and telecom companies cut advertisement spend by three per cent and seven per cent respectively.

Fixed cost was not spared either. Rents were renegotiated and salary cuts were implemented across the board. Many companies even retrenched people in large numbers.

That apart, India Inc also benefited from a lower interest rate regime. The sharp cut in repo rate by the RBI in a bid to stimulate economic recovery meant that cost of debt fell by 7.5 per cent. Nevertheless, companies still chose to de-leverage their balance sheet.

With a capacity utilisation averaging 59 per cent and little scope for expansion in the next couple of years, many companies have chosen to repay their debt. Good news is that this is not restricted to just financially strong companies. According to a Credit Suisse report, debt levels of stressed companies (those that have incurred loss in the last couple of quarters or have an interest coverage of less than one) have declined by 37 per cent from ₹23.8 lakh crore in June 2020 to ₹15 lakh crore in September 2020.

Difficult to replicate

A commendable performance indeed by India Inc in Q2. But this defensive strategy of cutting costs has its limitation and companies will find it extremely difficult to repeat that performance is Q3. While scope for further cost cut is minimal, some of the gains may well get reversed. Global commodity prices have started to firm up and, in many cases, are exceeding the pre-Covid levels.

This should push up the raw material costs for most manufacturers. That apart, employee costs will also rise as salary cuts effected earlier have been restored. As truck utilisation level improved, freight rates started moving up. Fuel prices too are inching up.

On the revenue front, Covid-19 has set the volumes back by many years for the industry. Take the case of automotive sector. Its volumes in FY21 are expected to be around the same level as FY10. Other sectors may not be this bad but their absolute volume recovery to pre-Covid levels will take time.

So if India Inc wants to see some real growth, it needs to get aggressive. It should shed its reticence and take risk. It should not wait for ideal conditions to emerge for investing in growth.

The US-China trade war and the re-alignment of global manufacturing capacities that it has triggered is a good place to start. Indian companies should, keeping aside its challenges in the domestic market, move quickly to grab that opportunity. Many companies, across sectors, are already seeing an increase in RFQs (request for quotations) and even orders from global players who were hitherto sourcing from China.

Companies that see an opportunity here should take the plunge. The government, on its part, has already reduced the corporate tax rate to 17.01 per cent from the earlier 34 per cent for new manufacturing companies incorporated after October 2019. This levels the playing field to a large extent.

The production-linked incentive scheme launched by the government for 13 sectors involving an outlay of almost ₹2 lakh crore can be used by companies to focus on backward integration and strengthening of their supply chain. This applies to pesticide, pharma, electronic and white goods manufacturers who import a lot of their supplies. Textile companies can make use of this scheme to shore up their competencies when it comes to man-made fibre textiles — an area India is traditionally weak.

Acquisitions route

Companies can also look at acquisitions. Covid-19 has been harsh on smaller and medium-sized players when compared to bigger players. This opens up opportunities for acquisitions both within India and abroad. While it is true that overseas acquisitions in the recent years have not exactly worked well for Indian companies, that should not hold them back for targeted takeovers that give them access to specific technologies or markets.

India cannot become a global manufacturing hub without the industry taking risk. The window of opportunity that has manifested now will not remain open for ever. If India Inc does not move fast now and remains content cutting costs, the country would end up missing the global manufacturing bus yet again.

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