May 24, 1999
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CORPORATE PERFORMANCE Retreat of the Recession Having swung back and forth into recession for three years, corporate India has reasons to be sanguine. But a roaring recovery is still far off. By Rohit Saran and Robin Abreu
First came the rebound in exports which were plagued with a negative or anaemic growth since 1996-97. In March 1999, Indian exports grew by over 10 per cent -- the fastest in 17 months. Following that was an upturn in manufacturing. The official yardstick of manufacturing output -- the index of manufacturing production -- rose by 6.6 per cent in February 1999, the highest level since February 1998. Though the growth slipped again to 2.8 per cent in March 1999, the spurt in tax collections in April 1999 over April 1998 (36 per cent jump in excise and 128 per cent in corporate tax) suggests an upturn in manufacturing in April.
But the most awaited sign of a recovery became evident in the corporate results for 1998-99 -- especially in the quarterly dissection of results which Indian companies have to now announce. Though still incomplete (less than 50 per cent of all listed companies had announced results till May 10), the results available so far suggest a distinct improvement in corporate bottom lines towards the end of 1998-99 (see table). The profit growth, which was a modest 7.1 per cent during 1998-99 over 1997-98, was actually powered by a 12.3 per cent spurt in profits in the last quarter of the year (January-March 1999 over January-March 1998). True, the indicators of revival are still sporadic and mild but they have ignited hope across the corporate world. Says Girija Pandey, director, ANZ Grindlays Bank: "All around, things are looking up." Seconds Omkar Goswami, senior consultant with the Confederation of Indian Industry (CII): "The economic fallout of Pokhran -- II and the bad budget of June 1997 has worn out. That, along with a resurgent rural demand, should drive industry out of the slowdown." In fact every single of the dozen industrialists and economists surveyed by India Today in the second week of May say that industry is coming out of the woods. This only corroborates the findings of two separate business-confidence surveys released last fortnight, which heralded the return of the "feel good" factor among businessmen. What's especially heartening is that the optimism is spreading despite the political uncertainty. Declares Sunil Bhandare, adviser, Tata Services: "Negativism is out, irrespective of the political instability, because business has realised that the worst is over and it's no more waiting for government initiatives." However, what the experts do differ on is the strength of the impending revival. Will the recovery blaze brightly but briefly? Or will it be a tide that will lift all the boats stuck on shore? Two fundamental factors will decide this. The extent of additional demand for consumer goods that two continuous bumper harvests (kharif and rabi) will generate and the magnitude of demand for housing and construction that the sops offered in this year's budget will create. Comments Subir Gokarn, chief economist at the National Council of Applied Economic Research (NCAER): "Initially the recovery will be led by consumer demand for products and services. It will strengthen only if demand for investment (cement, steel, machinery, etc) follows up subsequently." An early pointer to the latter is available in the annual results of two crucial sectors -- cement and steel. Against the distressing performance in the entire 1998-99 when the sales of cement companies plunged by 0.4 and profits by 51 per cent, the last quarter of the year (January-March 1999) showed a modest recovery with sales and profit growth recovering to 11 and 18 per cent. Thanks to the latent rise in cement demand, market leader ACC clocked a growth of 9 per cent in sales and 32 per cent in profits in its annual results. Says S. Ganguly, vice-chairman, ACC: "The demand of the middle class for housing will boost cement sales further and pull the industry out of the recession." To a lesser extent, the steel industry is following the sales pattern of the cement industry. The 37 per cent jump in the application for housing loans with Housing Development and Finance Corporation (HDFC) between March and April this year holds out hope that the pick up in demand for these industries will continue for at least a few more months. And along with new houses will come the demand for a host of products and services. Points out D.H. Pai Panandikar, directorgeneral, RPG Foundation: "New houses will create demand for all those products that a home needs and thus act as a strong sales booster." The fortunes of the consumer goods industries (the largest classification of industries ranging from cosmetics to food products to infotech and automobiles) have been fluctuating wildly for a few years -- and continued to do so in 1998-99. Not surprisingly, the fps trio -- FMCG, pharmaceuticals and software -- did exceptionally well in 1998-99 with profits soaring by 29, 17 and 103 per cent and sales climbing by 16, 20 and 53 per cent during the year. However, falling prices, brought on by the battle for market share, were the undoing of two major consumer industries -- consumer electronics and automobiles. The latter also battled with flattening sales. Barring two-wheelers, the entire automobile sector witnessed falling sales and profits throughout 1998-99. The consumer durable companies that have declared results so far have recorded a net loss despite a rise in sales. However a few firms like BPL have clocked better performance through efficient cost management and product and marketing innovations. That's the most instructive lesson emerging from this year's corporate results. The spurt in the last quarter profits evident so far is not driven by higher sales. Rather it is the result of one or the sum of the following -- better cost management, higher "other incomes" (sale of assets, etc) and lower interest burdens. Analyses R. Ravi Mohan, managing director of credit rating agency CRISIL: "In general, the companies have trimmed flab, become focused and are concentrating more of their core competence. That has enabled cost reduction." While cost cutting will continue to be helpful, the question is how long can companies sustain a positive earning trend without a substantive rise in demand? Industry's big bet for pick up in demand (and hence in sales) are the preceding two bumper crops and prospects of another good agriculture season. That is expected to turn rural consumers into big spenders sooner rather than later. Already the FMCG companies are riding the rural demand boom. The industry bellwether Hindustan Lever Limited (HLL) achieved a profit growth of 24 per cent between January and March 1999 over the same months of 1998. That when the profit growth in calendar 1998 was already a robust 44 per cent. Points out K.B. Dadiseth, chairman, HLL: "We will continue to do well largely because of resurgent rural demand." The urban demand will be trickier. While public-sector employees will continue to spend modestly ("Why Aren't You Spending", May 3), a big kick off in the demand from private-sector employees and professionals will depend on growth in salaries, which in turn will hinge on corporate performance. All this, however, does not mean that industry will smoothly chug along into a sturdy recovery in a few months from now. The roadblocks ahead are big enough to take the steam out of the recovery, even if they do not derail it. The looming political instability is one such speedbreaker. To be sure, most of the corporate world has learned to live with it and some experts view the forthcoming Lok Sabha polls -- with a price tag of around Rs 10,000 crore -- as an opportunity for demand creation. Quips Pai Panandikar: "Each Lok Sabha candidate will hire a few workers for campaigning, which will generate income and demand." Moreover, the economic policy stance of most political alliances in the fray are known and tested, which reduces the suspense regarding the future of economic policy. Say Gokarn: "Everybody (in politics) is now a known devil. That takes the sting out of political uncertainty." Yet the fall of the BJP-led Government has caused a policy vacuum that will dog the economy till a new government assumes office. Explains Goswami: "The next few months will be time to consolidate the gains of a likely upturn in industry. But that cannot be done by the lame-duck government at the Centre. While India won't have fresh growth-enabling policies in the next five months, the neighbouring east Asian economies will restructure themselves menacingly." Apart from the policy paralysis, the prolonged wait for a new government will put a clamp on the already low government investment. And that will perpetuate the infrastructure bottlenecks, especially if the revival sets in substantially. There is another built-in flaw in this recovery. It is, what economist call, a cyclical not a structural revival. In simple words, it means that the upturn is solely propelled by consumer demand which follows a natural cycle of rise and fall. For the revival to be strong and lasting, it has to be supplemented by structural improvements both within the industry and in economic policies. Economist Jairam Ramesh, who recently addressed a CII session packed with CEOs and economists on the causes of the slowdown, says, "Without structural changes the revival which is widely expected, will be shortlived." The two conditions required to strengthen the recovery is greater consolidation of industries through mergers and acquisitions by companies and a substantial fillip in private and public investment. But neither is attainable in the short run. The verdict is clear: While the recession is surely retreating, keep your fingers crossed for a rip-roaring revival. |
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Finally, the beginning of the end is in
sight. The 36-month-old slowdown in Indian industry, which often threatened to turn into
an outright recession (when production falls continually for six months), is apparently on
its way out. Not one or two, but a spate of positive economic developments in the past
fortnight suggest so. 
That's not all. Foreign institutional
investors (FIIs) also turned bullish on India in April and made a net (net of sales)
investment of $225 million (Rs 956 crore) in Indian stocks -- the highest since October
1997. In the first 10 days of this month FIIs poured in $137 million more, propelling the
BSE Sensex to 3,900. This was the highest the Sensex has reached since April 1998 when
nuclear testing at Pokhran had sent the stock markets crashing. 
