The Indian economy grew 5.1% in FY2012-13, the slowest pace in 10 years, as elevated interest rates, weaker global growth, and a stalled economic reform process all weighed on confidence and investment. While fixed investment grew just 1% in 2012 as both local and foreign investors curtailed operations, industrial production growth, which began to slow in 2010, stabilised at a rate well below potential. The OECD’s composite leading indicator, which supposedly leads industrial production data by a couple of months, confirms the near-term outlook, showing no lift in activity during the second half of 2013.
This was largely in response to actions of the government that revealed a disturbing anti-business tinge before Prime Minister Manmohan Singh’s new economic team began to turn things around late last year. The government’s economic reforms through the second half of 2012, coupled with lower interest rates, should lift India’s growth pace through the second half of 2013, but it will be some time before the economy is expanding at its potential rate. Meanwhile, this decline in GDP threatens to further weaken India’s investment rating. In fact, Standard & Poor’s, the US based credit rating agency, has recently warned India may lose its sovereign grade rating while its BBB- investment rating could be lowered further to junk status, which would make borrowing more costly. Interestingly, India is already the lowest ranked investment destination of the BRICS countries – Brazil, Russia, India, China and South Africa – with whom it had been seen as a rising economic power. “The Indian economy is in a crisis. While the growth rate has been declining…the issue of high current account deficit gets amplified against the backdrop of slowing economy, high fiscal deficit and persistent inflation,” says a recent report by National Council of Applied Economic Research.
Under such scenario mention the words ‘growth’, ‘investment’ and ‘strategy’ to India Inc. and they would, with reasonable certainty, point an accusing finger towards monetary and fiscal policy. But then, even in this environment, there are businesses that continue to outperform. A look at our B&E Power 100 list this year as compared to the last year’s list provides some interesting insights. There are 20 new entrants, and some of the prominent ones include Cairn India, HCL Technologies, Bayer CropScience, Bharti Infratel, JSW Energy, Idea Cellular, Cummins India, Reliance Capital and Reliance Communication. Notable exits include Sun Pharma, Sesa Goa, ACC, Cadila Healthcare, Nestle India and Bosh. The reasons vary greatly, but interestingly 68 members in the list have stayed the course and continue to be part of the list for the last six years. In fact, six of them remain in the top 10. Credit it to their world class practices, or their overwhelming hold on the market, they have managed to excel in the best and the worst of times.
This year, the B&E Power 100 list is led by Reliance Industries, which wrested the top spot from ONGC this year. While annual net profit of ONGC decreased 16.71%, from 251.22 billion in FY2012 to Rs.209.25 billion in FY2013, Reliance Industries reported a 4.81% increase in its net profit to Rs.210.03 billion in FY2013 from 200.40 billion in FY2012. It was the 11.10% increase (to Rs.494.24 billion) in under-recoveries during the last fiscal that was responsible for de-growth in ONGC’s net profit for FY2013. Interestingly, for the current fiscal, the company has lined up a capital expenditure plan of Rs.350.49 billion, while it was Rs.295.03 billion for FY2013.
Although public sector banking behemoth State Bank of India posted an impressive growth of 20.47% to register profits of Rs.141.04 billion (the bank reported net profit of Rs.117.07 billion in FY2012), it had to satisfy itself with 4th place this year (SBI was ranked 3rd last year). 3rd position this year was occupied by Vedanta Resources Plc’s subsidiary Cairn India. The company generated its highest ever revenues and net profit during FY2013 to make it to the B&E Power 100 list for the first time. While the company reported a staggering growth of 34,193.02% in its net profit, its revenues rose by 1,04,456.59%. Commenting on the amazing financial performance, Elango P., Whole Time Director and Interim CEO, Cairn India said that “the operating environment has substantially improved with key approvals coming in at a faster pace that enabled the company to ramp up Mangala production, bring Aishwariya field online, commence gas sales and most importantly re-commence exploration in Rajasthan.”
Nevertheless, there were a whopping 26 banks in the B&E Power 100 list this year. India’s largest private sector bank ICICI Bank, with a net profit of Rs.83.25 billion, occupied the second slot when it came to banks in the Power 100 list this year. However, most banks, particularly public sector banks, showed de-growth in terms of net profit. While Punjab National Bank’s net profit declined by 2.81%, Bank of Baroda and Canara Bank’s net profits decreased by 10.51% and 12.49% respectively. No doubt, the Indian banking industry survived the first phase of the global financial meltdown without much damage. But the aftermath of the European crisis and sluggish domestic economic conditions indicate that even Indian banks cannot sit pretty anymore. For instance, asset quality stress has remained at elevated levels for Indian banks, thereby impacting sector’s performance and outlook. However, over the last two quarters of FY2013, sector’s overall asset quality performance, particularly incremental slippages, recoveries and upgrades, suggest a moderation in overall asset quality pressures. During FY2013, the increase in annualised slippage ratio was 26 bps y-o-y, much lower than the increase of 38 bps and 57 bps y-o-y witnessed in the first nine months of FY2013 and the first half of FY2013, respectively, suggesting that H2 FY2013 has been better than H1 FY2013. Further, sustained moderation in inflation, apart from leading to faster than earlier expected downward movement in interest rates, should also ease margins pressures for corporate and SME borrowers and eventually revive growth.
Indian nominal interest rates have remained high compared to global rates over the past two-three years because Inflation remained elevated at 8-9%, even as growth continued to falter. However, sustained moderation in Inflation in the last quarter of FY2013 is a big positive for Indian economy and specifically for Indian Banks, as it would have a cascading impact on a lot of macro parameters going forward. Specifically, recent moderation in inflation has created a downward bias for bond yields, which would be sustainable, given the fact that the real interest rate differential between India and advanced economies is at a decadal high. In the first three fortnights of FY2014, Indian Bond yields have eased considerably. Both sovereign and corporate bond yields, across various maturity buckets have reduced anywhere between 60-100 bps and are expected to maintain a gradual and sustained southwards trajectory here on. In such a scenario, Indian Banks would be expected to witness significant treasury gains in FY2014.
As far as information technology (IT) sector is concerned, TCS retains its position as India’s most profitable IT company in India and ranks 5th on the list this year (it was at 4th position last year). Infosys Technologies, which once ruled the B&E Power 100 list when it came to IT companies, had to once again satisfy with second slot. With a net profit of Rs.91.16 billion in FY2013, up 7.63% from Rs.84.70 billion in FY2012, the IT services exporter was ranked 8 in B&E Power 100 list year.
Even the real estate sector in India has come off its peak two years ago and is currently being dragged down by a host of issues. Result: No real estate company could make it to the B&E Power 100 list this year. The reason is simple. For the last two years, the real estate sector in India – whose market size is expected to reach $90 billion by 2015 – has been witnessing slowing demand and inventory pile-up. The unsold inventory in residential real estate so far this year has been the highest in Delhi-NCR at 102,758 units, followed by the Mumbai metropolitan region at 90,512. Bangalore comes next with 46,596 units, and Pune follows with 40,734 units (PropEquity statistics). At the same time home loan interest rates have refused to come down and this has dampened sales even further. Growth in home-loans dropped to 9.3% for the year ended March 2013 from 12.1% in the last fiscal year.
To make matters worse for the industry, most of its leading players are reeling under high debt. The cost of debt for most real estate companies is in the range of 12-15%, on the basis of which the combined interest burden itself on them is between Rs.40 billion and Rs.50 billion. With home sales at abysmal lows, real estate companies are finding it difficult to deliver their projects or repay their growing debt on time. In fact, according to industry estimates, the combined debt of the country’s top 11 listed real estate companies stands at around Rs.350 billion. While many small property developers face the risk of default, the big ones are trying to overcome the situation by delaying projects, discounting properties and even selling assets.
The Indian telecom juggernaut, which had chugged along at a fast pace in recent years, is also facing strong headwinds from several quarters. Between 1998 and 2010, when the industry garnered spectacular growth rates – witnessing an unprecedented boom of more than 700% in subscriber base, from just 1 million subscribers to over 750 million – the idea of any imminent slowdown would have been laughed out of court. But intense competition in the sector over the past few years has dented the profitability of operators and affected their earnings. From just 3-4 operators competing in any particular service area till a few years ago, there are now many more competing for the pie in any given circle now. Not surprising that Bharti Airtel, India’s largest telecom operator by both revenue and subscriber base, is bleeding, both in its domestic and international operations, and in most of its business areas. The company, which was ranked 13th on B&E’s 2012 list of Most Profitable Companies (with a net profit of Rs.57.30 billion), is down to 17th rank on B&E’s 2013 list of Most Profitable Companies reporting a net profit of Rs.50.96 billion, a 11.06% decline over last year’s net profit.
While for Big Pharma, this is a period of unprecedented difficulty, a time to retrospect on past failures, Indian generic firms are bang in the middle of a potential dream run. As a recent Frost & Sullivan report points out, drugs worth around $150 billion are expected to go off patent protection globally. This has naturally opened a huge window of opportunities for Indian drug manufacturers. In fact, they have already started reaping in the benefits. Profitability figures certainly suggest that some players are moving away from the shadow of a difficult past in the latter part of the previous decade. While Cipla reported net profit of Rs.15.07 billion, growing by 34.19% y-o-y (it gained 13 places in the Power 100 list to rank at 52), Dr. Reddy’s Labs gained 20 places in the Power 100 list to rank at 60. Its net profit too grew by 38.71% y-o-y to Rs.12.65 billion in FY2013 from Rs.9.12 billion in FY2012.
No doubt, India’s growth rate has been steadily slowing for the past two years, and it is not yet clear whether the bottom has been reached. Even for the current year, things do not look good for India Inc. “Aggregate PAT growth for the full year (FY2014) works out to only 6%, the lowest since FY2006-07 excluding the global financial crisis year (FY2008-09),” says a recent report by Motilal Oswal Securities. But then, as per our analysis of 129 BSE 500 firms (excluding banks), retained cash reached over Rs.1.1 trillion or 8.67% of net sales in FY2012-13, quite close to 9.67% of net sales in FY09, which was a benchmark in ‘crisis terms’. While fiscal and monetary policy is critical, it is extremely important for the profit leaders of India Inc. to continue making strategically relevant investments to reinvigorate a positive economic spiral. After all, we still belong to an economy whose demand fundamentals are quite strong.
