As the stock markets slowly but steadily recover from months of pain and as optimism fills the air with the swearing-in of the new government and its announcement of a 100-day plan, one thing is clear: chief executives will have a new set of priorities to deal with.
It?s no more about cost-cutting alone, which was the dominant objective of most managements following the financial meltdown in September 2008. The accent now is on growth. As Arvind Singhal, chairman of New-Delhi-based management consultancy KSA Technopak, explains, ?The focus will have to shift. The challenge will be to get companies back on the growth track, which was set aside following the slowdown.?
But this emphasis on growth is different from what was visible over a year ago in most organisations. At that time, the feel-good factor propelled many companies to indulge in excessive behaviour. Big plans, big-ticket acquisitions, mass recruitment?Corporate India was on a roll.
A key reason for this over indulgence was the easy availability of capital?both debt and equity?which buoyed promoters to take that leap forward to enter new markets, buy new companies, invest in new products or acquire customers. Nevertheless, it wasn?t uncommon for promoters back then to come out with large public offerings like real estate developer DLF?s over $2 billion IPO in mid-2007 or the Reliance Power IPO, which was of the same size but launched in early 2008.
By some estimates, property developers alone mopped up over 40% of funds through the IPO route in 2007. It was a year when big-ticket public offerings were the flavour of the season. Power companies, on the other hand, mobilised about 13% of resources in the primary market that year, while telecom players mobilised about 8.69% of funds via the IPO route.
International investors too were excited about the India story. For instance, foreign institutional investment (FII) and foreign direct investment (FDI) into India between 2004 and 2007?considered to be the height of the bull run?was $45.5 billion and $60 billion, respectively. External commercial borrowings in the same period stood at $62.7 billion.
Credit offtake in general in the domestic market was high on account of the willingness of banks and other financial institutions to lend money to borrowers. No wonder, corporates were able to indulge in some significant amount of M&A activity in this period, whether it was Tata?s acquisition of Corus in 2006 or the UB group?s acquisition of Whyte & Mackay and Air Deccan in 2007 or Suzlon?s acquisition of REpower in the same year. It was all possible because the capital was there and corporates could get it. ?Raising capital was never a problem for small or big corporate houses during the bull run,? says an investment banker based in Mumbai.
Following the credit crisis in the US and other markets, however, liquidity was squeezed, compelling most to scale down their activities considerably. An indicator of the liquidity pressure was the pullout of money by FIIs in 2008. Net FII outflow stood at $11 billion in the last calendar year.
Though governments and central banks across the world including India have been giving adequate stimuli to their economies from time to time to help revive both production and consumption, lenders have been tad slow in aiding the process by disbursing corporate and consumer loans. For instance, up to the week ending May 22, 2009, year-on-year bank credit in India was down to about 15.86% from 17.20% in the previous fortnight ending May 8, 2009.
This trend of jittery lenders is no different abroad where cost of borrowing has traditionally been cheaper for Indian companies. All of this in a sense has compelled many corporate houses to give up their excessive behaviour and conserve precious resources. As Avinash Gupta, national leader?financial advisory practice, Deloitte, puts it, ?People are more rational now. Irrational behaviour is out of the question.
This point is seconded by Sandeep Singhal, managing director, Nexus India Capital Advisors, a firm which manages a $320-million fund, one-third of which has been invested in almost 20 companies here, ?Shareholders/promoters expect the company?s management to prioritise their activities. What is required to be done first and how best can you achieve it in the given scenario with the given resources is what they want. Managing cash is the order of the day. You can?t ignore it.?
This challenge of managing cash flows is valid across small and large companies. Says Ajit Isaac, managing director & chief executive officer of Bangalore-based executive search, recruitment and staffing solutions firm Ikya Human Capital Solutions, ?It?s clear?the one common objective of MDs/CEOs despite the mild recovery will be efficient management of cash. This is possible by managing costs appropriately. How you do it is a challenge.? He adds, ?The next priority would be to manage working capital which again stems from the need to manage cash effectively.?
He thinks that the next challenge would be to retain the customer base. ?In tough times, I think, it is the most important thing to do. Effective utilisation of assets is also imperative in times like these,? he adds.
In other words, corporates cannot undertake growth for growth?s sake, say analysts. That phase is long over. Whatever has to be undertaken has to be done keeping in mind the business objectives of the organisation, say experts. ?There is no room for wasteful spending,? says the chief executive officer of a blue-chip company.
The last ten months in a sense have demonstrated how important it is to stick to basic business objectives and fundamentals. Mindless expansion can wait. Indeed, it is avoidable in the post-September 2008 economic order.
This was visible when Ratan Tata, chairman of the Tata group, whose annualised revenues are over $50 billion, admitted to a foreign publication last month that he had possibly overstretched himself with the acquisition of JLR in March 2008. ?If we had known there was going to be a meltdown, then yes, but nobody knew,? he was reported to have said.
Given that the slowdown is far from over, the pressure on heads of companies remains. Says Mahalaxmi DM, India manager of Aquent, a global HR firm that specialises in recruitment of professionals in the media, marketing and creative domains, ?The climate may have eased, but I don?t think there is a let-up in objectives concerning cost-cutting. That remains because not all sectors are seeing growth per se. Telecommunications may be an exception. It is growing. But not all sectors are.?
It clearly puts the onus then on MDs/CEOs to make sure that everything is in order. Says the managing director of an insurance major on the condition of anonymity, ?Wanting to grow is fine. But jumping onto the growth bandwagon on seeing the first signs or stirrings of a recovery would be a mistake. The right thing would be to wait and watch and see how the situation pans out. The lessons of the past are before us. I don?t think it is right to rush.?
According to Mahalaxmi of Aquent, the first challenge for a CEO would be to optimise the resources effectively. ?You have to basically manage what you have to make sure where you want to go. The second challenge would be to protect oneself from competition from the unorganised sector.? She adds that a slowdown or a downturn actually sees the emergence of individual entrepreneurs, senior people who opt to go solo rather than face the pressure working in an organisation.
?They are content with work on project basis. The pressure is less that way. This means that established players have to deal with that many more competitors who are willing to offer the same service at a lesser price,? she stresses.
But even as optimisation of resources remains key, some observers are of the opinion that innovation and growth should not stop. ?Why should it?? asks the managing director of a Mumbai-based firm. ?I don?t think growth can be compromised.?
This point is also reiterated by Manak Singh Narula, executive director of the Mumbai chapter of The Indus Entrepreneurs (TiE), a global non-profit organisation for entrepreneurs. He says, ?It may seem that prudence and growth are two opposite ends of the spectrum. But growth can be managed in a manner where you are not over committing yourself.
Innovation can help in this endeavour.? He adds that the head of an organisation needs to bear this in mind otherwise he could lose out on some golden opportunities in a downturn.
R Sriram, former founder and chief executive officer of the Crossword chain of bookstores, who now runs a retail and business consultancy called Next Practice Retail, says, ?The point is that a challenge should be viewed as an opportunity in disguise. There are areas that can be looked at in terms of growth. A recession or downturn or slowdown can actually give you the space to do it. In a boom, one is too busy doing business as usual.?