A step back...and one forward! - Views on News from Equitymaster

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A step back...and one forward!

Jun 26, 2004

While FY04 will be remembered as the year when the Indian economy achieved one of the finest growth in its history, the performance of India Inc was not bad either with most of the companies marking their entry into the select club of US$ 1 bn companies. However, one thing that has probably not deserved the kind of attention it should get is that apart from robust growth numbers, there has been a sharp improvement in the productivity of most of the companies, thus making the bottomline growth even stronger. In this article, we have made an attempt to highlight this factor and try and analyse the reasons behind the same.

The chart above indicates the YoY growth of the different performance parameters of India Inc's top 10 manufacturing companies for FY04, taken on a consolidated basis. It is clear from the figure that the year has witnessed a significant improvement in productivity, as growth in bottomline has been much higher than the topline growth. What is even more encouraging is that the improvement has come at both the levels viz. the operating and the PBT levels.

With the world fast turning into a global village, it was imperative for the domestic companies to become globally competitive. In other words, manufacturing the best possible products at the least possible cost. This had led them to embark on a vigorous cost cutting drive and improve upon all aspects of their operations. Getting rid of excessive workforce, working in close co-operation with their suppliers, building large-scale operations and adopting the best manufacturing practices in the world has resulted into significant improvement in productivity at the operating levels. It is no surprise that today we boast of companies such as Tata Steel, Nalco and Gujarat Ambuja, companies that have emerged as the lowest cost producer of goods, perhaps even globally, in their respective industries.

High cost of funding had been the bane of Indian companies for quite some time. But not anymore. Aware that in order to grow the economy, it will have to encourage consumer spending as well as make Indian companies cost competitive, the government has over the years consistently reduced interest rates and this has enabled them to significantly lower their interest expenses, thus resulting into higher growth at the PBT levels. Moreover, government has also given domestic companies more leeway in tapping foreign capital, an important source of borrowing low cost funds. The growing popularity of sophisticated financial instruments such as Foreign Currency Convertible Bonds (FCCBs) and warrants is also aiding domestic companies to further lower their interest burden.

The rise of India as an IT powerhouse has also done its bit to help the domestic manufacturing shore up its bottomline. Implementation of software tools such as the Supply Chain Management and advancements in logistics management has led to a marked decrease in inventory and accounts receivables, thus bringing down working capital requirements.

While all these factors have helped the companies at the micro level, improvement in productivity also has positive implications for the country's economy. Since the resources at a nation's disposal are only limited, the idea is to make the most efficient use of the same, so that higher growth can be achieved. It also results into higher tax collections, which can then be utilized towards creating even better infrastructure such as roads, power, ports etc, thus resulting into even higher productivity. Improved productivity also leads to better stock market performance as higher EPS would lead to higher valuations and ultimately higher returns for the investors. All in all a winning proposition.

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