The new accounting norms issued by the Institute of Chartered Accountants of India (ICAI) late this March, could not have come at a more difficult time for Indian corporates. ICAI had, with immediate effect, asked corporates to follow an accounting norm, that forces companies to disclose and/or provide for all losses on derivative contracts that they would have incurred. According to estimates, the cumulative losses incurred by corporates in this respect last fiscal would be as high as $5 billion (Rs 20,000 crore).
This comes at a time when the global markets are in turmoil and the domestic market has tanked from its mind-boggling heights on global cues. The benchmark Sensex, that had at one point in January crossed 21,000 points, is now loitering at 15,000, and according to certain major brokerage firms, is expected to touch 14,000 soon. Apart from the thousands of small investors who have burnt their fingers in the stock markets, certain large corporates too had to bear the brunt – the lukewarm response to the Reliance Power IPO is a case in point. Certain companies like real estate giant Emaar MGF and Wockhardt Hospitals had to shelve their plans to raise money through initial public offerings (IPO).
Yet another factor that Indian corporates have been battling has been the recession in the US, although many companies still refuse to admit how much they would be hurt from the impact. Starting with the subprime crisis a few months back, which threatened to erode some of the high-value businesses of Indian corporates who have large exposure to the US market, the spate of bad news has taken its toll on some very large firms in the global financial sector. In the bargain, the Indian subsidiaries of these firms have been hurt. To add to the woes of companies, especially those into the commodities business, inflation has touched a new high of 7.41%, the highest in three years. The Cabinet Committee on Prices (CCP) has already taken measures to cool off prices, which include abolishing import duty on all crude edible oils, and a ban on the export of non-basmati rice and pulses. The government has also banned cement exports and is said to be considering a spate of measures to bring down the prices of steel. Steel prices soared to as high as Rs 40,000 a tonne for hot rolled coil, and now steps like putting restrictions on steel exports, reduction in customs and excise duties, and rolling back hike in railway freight on steel are being considered.
Despite all this, there have been a few bright spots on the horizon. The Indian economy still remains one of the fastest growing economies of the world, with finance minister P Chidambaram reiterating that the country?s gross domestic product growth will remain in excess of 7%.
According to forecasts by the International Monetary Fund, India?s GDP growth rate will be 7.9% in 2008 on the back of weaker demand for Indian exports and higher financing costs. The GDP growth in 2009 would be 8%. Indian corporates have also been steadily showing an appetite for mergers and acquisitions (M&As) abroad during the last few years, with three large deals coming from the stable of India?s most diversified corporate group – Tata. Tata Steel?s acquisition of UK?s Corus Steel for $12 billion, Tata Motor?s $2.3-billion buy of Ford?s Jaguar and Land Rover, and Tata Chemicals? General Chemical Industries Products (GCIP) buy for $1.5 billion stand out amidst others like JK Tyres? Rs 270-crore buy of Mexico?s Cornel and Jubilant Organosys? acquisition of Canada?s Draxis for $255 million. There?s no longer any stigma attached to Indian companies making big buys abroad. There?s no question regarding India?s managerial talent or Indian companies? ability to raise finance from foreign institutions. According to Alan Rosling, who is responsible for the globalisation efforts of the Tata Group, not once in the Corus negotiations did the Tatas feel they are upto something that is not their cup of tea. ?There was not a voice who said that we are Indians or we are foreigners,? Rosling said in a recent interview. So was the case with the whole process of Jaguar and Land Rover. ?There is no concern coming out of our nationality. The questions are, be it Japanese or Koreans, who is the right owner for the assets, and what the new owners would do with the assets.
Apart from Indian corporates? zeal for M&As, the domestic market in itself is presenting a plethora of opportunities. Let?s look at the infrastructure sector, for instance. According to a Lehman Brothers research report, ?Over the next five years, we expect industrial capex to be 2.6x the investment seen in the past five years. Similarly, in the infrastructure space, investment in the Indian government?s XI plan period (FY08-12) is expected to be around 2.45x the investment in the X plan (FY03-07).? This offers huge potential for companies operating in that space.
The retail segment is another case in point. Ernst & Young has predicted that the organised retail market in India will touch nearly $30 billion by 2010. The overall size of the retail sector in India is expected to touch $427 billion by 2010 and $637 billion by 2015. More and more Indian companies are entering the segment either on their own or in alliance with foreign firms for setting-up shop in the country. Already, a large number of premium brand outlets have come up in the country, ever since the government permitted majority control for foreign single-brand retailers in 2006.
Domestic companies like Reliance Retail, Bharti, Future Group, Essar, Shoppers Stop, and the Aditya Birla Group have their retail business going full throttle. Many others have announced their plans for an entry into the segment. On the other hand, foreign multi-brand retailers such as Carrefour and Wal-Mart have also made plans to enter the cash and carry segment.
Despite the recent turmoil in the domestic and global markets, analysts have kept the same company guidance for FY09. In a recent note, Credit Suisse also said that earning confessions from companies are likely to be mild in magnitude, partly because of their faith in quick reversion in global and domestic economies. ?We wish corporates will realise the strength of the cyclical forces at play and provide conservative estimates,? Credit Suisse said in its ?Asian Daily? recently.
The recent Dun & Bradstreet Business Optimism Index shows a 23.6% decline on a yearly basis. Five of the six optimism indices – volumes of sales, net profits, selling prices, new orders, and inventory levels – have declined, as compared with the previous quarter, D&B said. The services and the capital goods sectors were the least optimistic. ?Since a majority of the services sector respondents belong to the IT, financial services, broking houses, and trade segments, it is possible that the strong rupee, a slowdown in global growth, and the bearish sentiment in stock markets have dampened expectations of respondents from this sector,? the report said. Further, with global credit squeeze, access of firms to external funds has been limited, while the domestic cost of capital remains high.
These are, thus, challenging times for Indian corporates. Only a sustained and proactive effort on the part of Indian companies will help them anticipate these and devise strategies to keep ticking in these trying times.