They couldn?t be in a happier situation. Having grown their profits by over 20% last year, driven by a 30% plus increase in the three months to March 2010, Indian companies are sitting pretty. To be sure, the growth came in on a low base. But the resilience that Indian corporates have demonstrated in a difficult economic environment is remarkable. Today, almost a fourth of their balance sheets is in cash, putting them in a position to invest for the future. Indeed, if the GDP numbers for the March 2010 quarter showed a remarkable 17.7% jump in investments led by infrastructure and private sector projects, it?s in sync with the ground realities. The resurgence in demand, after the downturn that began in late 2008, has convinced Indian companies that there are takers for everything, whether it?s electricity or cars.
That confidence is reflected in the order books of capital goods companies, which are at a three-year high; or in two-wheeler makers like Hero Honda and car-maker Maruti Suzuki hurrying to put up new capacities. RC Bhargava, chairman, Maruti Suzuki India, says Maruti, which sold close to 8.7 lakh cars in the home market last year, is looking to grow volumes by 10-12% this year, but points out that if car sales grow by 25%, Maruti may not have the means to cater to the higher demand.
A clutch of capital goods companies, studied by IndiaInfoline, now has an order coverage ratio of 2.9 times after a strong build-up in their order books in March 2010 quarter, up 65% year-on-year and 40% sequentially. Engineering major Larsen & Toubro, for instance, saw inflows of Rs 23,800 crore, while Bhel bagged orders worth Rs 22,600 crore during the quarter. The capex cycle is clearing turning; as IndiaInfoline points out, revenue growth for capital good firms has more than doubled in the early part of 2010 from that of the nine months to December 2009. While it?s not surprising, as R Shankar Raman, executive vice-president, L&T, points out, orders do tend to bunch up as the year draws to a close. Since the industry was coming off a slowdown, this time around, there has been a virtual deluge. Moreover, what?s encouraging is that execution, which had slowed from late 2008 in the wake of the liquidity crunch, has picked up. A sense of urgency seems to have returned to sustain the momentum. Clearly, power generation capacity is being added and more highways are being built. Even on its fairly large base, L&T believes its order book could grow by about 25% this year on top of a 35% growth last year.
If the investment engine is chugging along, the twin consumption engine isn?t exactly slowing down. For sure, the growth in private consumption was just 2.6% in the March 2010 quarter, the lowest since June 2003, and thus, a tad disappointing. Consumer staples firms have been in a bit of a spot for some time because of raging food inflation; though they have clocked reasonably good volumes, they have lost the pricing power in a fiercely competitive environment and some had to take price cuts. At Marico, for instance, volumes grew at a quicker pace than revenues. The pricing power won?t come easy this year and it will be volumes, driven by better reach into the hinterland, that will probably save the day and help protect their profitability. Strong rural incomes together with falling inflation will also help sustain sales of two-wheelers.
Goldman Sachs says domestic demand continues to accelerate as can be seen from the growth in credit?running at nearly 18%?the PMI Index and auto sales. Tata Motors, for instance, managed to increase volumes by 40% in May. Hero Honda believes it could grow volumes by about 12-15% this year. Indeed, automobile players will breathe easier as their raw materials bills become smaller, thanks to lower prices of steel, aluminium and plastics, though rubber prices are at peak levels. But the benefits could take time to be visible because forward contracts have been negotiated. As Kevin D?Sa of Bajaj Auto explains, ?Prices of aluminium have fallen by about Rs 4-5 per kg and so, there will be some respite. But we also make three-wheelers and although steel prices are lower by about Rs 2,000 per tonne, the impact will be felt only towards the year-end. All in all, the benefits from a fall in commodity prices won?t be very significant, especially if the government increases the prices of auto fuels.?
If cash flows for India Inc aren?t as strong as they were last year, the reason would lie partly with the toplines of metal players, because even if volumes sustain, realisations would not be as high. Experts predict the biggest slump in the prices of commodities since the financial crisis of 2008. Also, companies have saved on interest outflows, which could rise this year, though these comprise an insignificant share of sales.
Even as they appear confident about the future, companies aren?t ignoring the problems in the global economy. The financial troubles in the eurozone may not have a big direct impact on the Indian corporate sector?Bank of America Merrill Lynch?s economists reckon the direct impact of the European slowdown should be limited to 30 basis points of GDP growth.
However, a delayed global economic recovery and adverse currency movements could hurt. Europe brings in almost a third of Tata Motors? sales, though for Maruti Suzuki that exports the A-Star model, the share is smaller at 10%. The Maruti management has indicated that exports this year will be lower. In the pharma pack, Ranbaxy, Dr Reddy?s and Cipla have the biggest exposures to Europe at 18%, 14% and 10%, respectively. Again, United Phosphorus earns 25% of its revenues from Europe, though the company doesn?t really face a currency risk because earnings from the geography are hedged against euro-denominated loans. Hotel chain Indian Hotels, whose international operations dragged down profits last year, could take time to recover. While room rates are expected to remain firm in the home market, occupancies may not pick up significantly at overseas properties, given the weakness in the global economy. As Morgan Stanley points out, a single property, the St James Court in London, alone fetches about 8% of the chain?s consolidated revenues and a tenth of its operating profits.
Although deal flows are strong, the IT lot will probably be the worst hit by the weakening euro even if a weaker rupee cushions the impact. As S Mahalingam, CFO, Tata Consultancy Services, observed recently, ?This is a more stressful time from a currency management time since we deal with the euro, pound and the dollar, all of which impacts our revenues. However, we also have expenses in euro and pound, and there is a fair amount of onsite work. So, the impact on the margins is not as large as it seems.?
Mahalingam said TCS had altered its hedging strategy, adding protection at Rs 67 against the pound and Rs 57 against the euro. He was convinced TCS would be able to deal with volatility. Indeed, this combination of caution and confidence is exactly what?s needed. So far, India Inc seems to have plenty of it.