Talk to bank chiefs, investment bankers and private equity players and the theme these days in the corridors of Mumbai?s financial circuit is the same: times have changed for India Inc, and quite palpably so. Government data bears this out, the policymakers are on an overdrive trying to get a fix on the economic shocks and Reserve Bank of India (RBI) is readying to unveil the first quarter review of its annual Monetary Policy amidst heightened uncertainty.
Bankers who have large corporate portfolios say they are not willing to look at anything remotely longer in tenure than two years, at a maximum. Most have stopped taking a four to five year view, given the changed dynamics facing the corporate sector.
Consider this: one year ago, on July 13, 2007, the Bombay Stock Exchange Sensex was at 15,272.72. It hit 21,206.77 on January 10, 2008, and as this column is being written, the benchmark index is down to 12.575.80. A year ago, it seemed nothing, absolutely nothing, could stop India Inc from powering ahead, as companies rolled along, expanding aggressively domestically and pushing through large domestic and overseas expansions. As the stocks of Indian companies surged on the bourses, India Inc successfully leveraged this buoyancy and struck up large acquisitions. A year down the line, banks which were bending over backwards to lend to companies are now openly admitting that they?d rather wait and weigh their options carefully. Input costs – raw material, steel, cement, energy ? have risen sharply, margins are squeezed, demand is sluggish, stock prices have crashed and bottomlines are under extreme pressure. ?We have shrunk our horizon to less than two years. We?re not touching anything beyond that,? admits a frontline foreign bank boss. Bankers say the uncertain scenario means there is a genuine risk of time and cost overruns in projects and, in the worst case, even project failure. Hence, for them, the best strategy would be to take a shorter-term view.
In such a scenario, how does India Inc?barring, perhaps, the top few business groups?which had acquired companies overseas and drawn up aggressive domestic growth plans too, keep these going? Does this mean firms will need to look at other sources of funding, like venture capital and private equity?
Financial market players say that as the going gets tougher, the overseas and domestic expansion plans of Indian companies will be the ones where India Inc will face the biggest challenge. It?s only the third component of the business ? the existing domestic operations ? which will keep going, with short-term funding from banks coming in. The significant part is, while conventional logic may say that when banks turn shy, private equity funds may be willing to step in, PE too may not be that obvious an option for companies at this stage. Indian corporate houses may still want to hold out for a bit more, since the valuations game kicks in the moment a PE fund comes into play. Corporate bosses and PE funds admit that despite tough times, promoters are still not willing to reduce valuations that drastically, even as a few PE players may be keen to beat valuations down, taking advantage of the uncertain times.
?PE funds will now increasingly take on the role of distress funds in some cases,? predicts a private equity player. But, in general, many of them would be keen to wait and watch, without taking calls until some months down the line. PE funds may want instruments – in the nature of convertible bonds ? which take care of their need for higher returns while minimising the downside risks.
Financial circles say India Inc may be able to hold its own for another two to three months, and the scenario will be clearer once the second quarter results are declared. Just as India Inc has gone global aggressively, Indian companies will now need to muster all the expertise and strategic thinking at its command to tide over what is clearly its most challenging phase yet.
sourav.majumdar@expressindia.com