Expect nothing, live frugally on surprise.

Thursday, October 23, 2008

Bright Side of Financial Crisis

There are times when the analyst is only as good as the astrologer. Some may say that this is true at all times. But this is particularly true right now. In the corporate world, the future is suddenly looking a bit foggy. Will the credit situation ease? Has the world done enough to calm the storm unleashed by the subprime crisis? Is India really decoupled? Even though the financial pandemic is less than two months old, it has had severe implications. Liquidity is tight and it is expected to remain so at least for the next several months forcing banks to shut their doors on approved limits despite the high earning potential. The Fed’s interest rate cut of 75 bps is for the time being having a calming effect on the US economy. Yet investors remain nervous both in India and the rest of the world. The view from within industry in India is a bit different though. Yes, the general sentiment has had its impact if one looks around the boardrooms. By the standards of the festive season, the retail and consumer durable sector’s growth has been sluggish. Business is down 10 to 15 per cent with discretionary spending coming down and demand for goods with credit-based buying taking a tumble. It is worse off when they converge. Net importers are finding the going tough while borrowers looking for foreign currency are shooed away by banks. Just a few months ago, it looked as if every company had hung a board outside its doors — Trespassers will be offered jobs. The situation has changed. The bravado of India Inc after acquisitions like Jaguar, Corus and Arcelor is looking shaky. Those who have relied on instruments like FCCBs and borrowings against promoter stake have been hit most. Lay-offs are being contemplated. Yet there are traces of optimism and opportunities. The optimist in me sees the tilt towards opportunity rather than threat. Even though it is becoming more expensive to do business in India, dollar exports are getting more lucrative. The business pressures in corporate America will result in increased outsourcing opportunities to India. As the cost of oil, steel, machinery, commodities and infrastructure fall, crucial investments will become cheaper. We have already marked down the cost of ongoing and planned projects. Cost of land and commercial space has begun to correct and all retail sector players are revisiting strategies to take home the benefits. Demand for essential goods remains strong. Rural India’s liquidity is at decent levels and expectations are that some of the FMCG majors will show impressive Q2 numbers. The government and the RBI have been on high alert and responding to the situation quickly. The situation has also re-emphasised that the Indian financial system is mature and well managed. The financial turmoil has affected China too. In a phenomenon unprecedented in recent times, China is cutting production. Suddenly, there is a possibility that the Chinese threat to India might be blunted. Usually in such situations, good companies emerge leaner and stronger. Companies are taking a good look at the pay packages of executives which had shot through the roof. Salary cuts are becoming a live issue. Also, hiring fresh talent from premier institutions that have sunk will become easier. The likes of Lehman Brothers and Goldman Sachs are not visiting the IIMs anymore. That presents a new opportunity for Indian companies, to hire the cream of talent. Similarly, attrition should see a drop and the present scenario offers the opportunity to lay off unnecessary manpower and to outsource work. There is also an options for Indian companies to hire global talent. This is a good time for clever acquisitions as good businesses that have been seriously affected by the crisis will be available at attractive prices. Let me talk about two sectors where we are involved — IT and retail. In the IT sector, though there are not too many fresh projects being sanctioned in the US, the existing infrastructure and application maintenance jobs will increase, accompanied by the bonus of a favourable exchange rate. Outsourcing will rise as US firms try to cut costs even further with gains for the BPO sector. Acquisitions will gain momentum in the IT space. In retail, there will be more rational thinking and cautious expansion. Private label sales should see improvement as customers seek out more utility and less brand value. The lower margin stores will improve as rentals that rose sensationally will fall and retail players will close laggard stores at a quicker rate than before. The coming together of the two rival airlines, Jet and Kingfisher, was possible only due to the current situation. Earlier, such understandings were products of greed but today these treaties are survival tools. Over the next several months, industry will see cost of services fall sharply as we have seen with commodities. That will help bring in some respite to production costs which have been spiralling for the past few months. For the moment as liquidity goes into crisis mode, cash will be king. Profit margins will take the next slot in order of priority while top-line growth and dreams will take a back seat. India’s present need is not heroics but hard work; not novelty but normalcy; not revolution but restoration; not surgery but serenity; not the dramatic but the dispassionate; not experiment but execution; not submergence in internationality but sustainment in triumphant nationality.


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