Or should that be struggling to survive?
After promises of growth, India's largest listed companies have had to
squeeze profits out of operational and financial efficiencies. Volume growth
seems to be a dream that may come true sometime in the future and pricing
power determined largely by global forces for most of the Indian companies
covered in the 1999 edition of the Quantum Stock Market Yearbook. There
will be exceptions to the rule with the software companies and the consumer
goods still fairing relatively well. For the year-ended March 31, 1998
the 100 listed Indian companies covered in the Quantum Stock Market Yearbook
have managed to increase the net profit margin to 8.7% from 7.8% in FY97.
This higher profit in a slowing economy was achieved largely by reducing
operational costs. The gross profit margin of the companies surveyed was
23.6% in FY96, 23.4% in FY97, and increased to 25.0% in FY98.
At a financial level, the companies
also managed to maintain their interest expense at 10% of sales despite
a 16% addition to assets (which results in interest being shown as an expense
and reduces the profit and loss account, and not capitalised). These larger
Indian companies with more negotiating power presumably got their less
powerful suppliers and buyers to absorb much of the pain by pushing the
working capital burden onto the small companies. The other financier for
corporate India was the government - effective tax rates declined from
23.7% in FY97 to 20.0% in FY98. All this contributed to the recovery in
the net profit margin from 7.8% in FY97 to 8.7% in FY98. But all that is
history. The question now is, with Diwali come and gone, and the promised
recovery still elusive what will happen in FY99 and FY2000?
Sales of the Quantum 100 will barely
increase for FY99 and the next year, if the recovery finally arrives, will
me muted because of pricing pressures. Gross profit margins will decline
and the effective tax rate will increase. The current lethargy in the economy
has resulted in lower capital expenditures which, in turn, will result
in lower depreciation benefits and, hence, the higher tax rates. The good
thing about the lower capital expenditure is that long term debt will slow
and this may result in a lower interest cost - unless the Indian government
continues to allow the rupee to weaken. Foreign exchange loans taken by
Indian companies in 1994 and 1995 will need to be repaid and re-financed
at higher interest costs and with potential fx losses. With the share market
unlikely to rise, interest in new issues will be minimal. The most active
issues will be rights issues that will be used more as a vehicle for existing
managments to increase control over their companies. Share buy-backs will
confuse and continue to be modified - like the noise over takeovers.
The ability to cut costs and improve
operational efficiencies will continue to be the focus for FY99 and much
of FY2000. With a government suffering from verbal diahorrea and limited
longevity, companies will have to continue to focus on reducing wages per
output by lowering salaries per staff, or lowering the number of staff,
or making the same number of staff produce more without increasing their
salaries. With the wages per employee having grown by 14.6% in FY98 (0.8%
in FY97) and the effects of the increase in wages for government employees
giving courage to private sector unions to demand more, this will be a
tough task for the Quantum 100.
And since many of the companies in
the Quantum 100 are majority-owned by the government, reducing manpower
costs when the prices of onions have increased will be impossible! Exports
will continue to be slack and and corporate India will still be a drain
on India's fx reserves. In FY98 the Quantum 100 spent US$ 10 billion (40%
of India's fx reserves) since their net imports were more than their exports.
The government should stop giving incentives to boost exports and force
the Indian companies to improve their quality and service and earn their
own foreign exchange.
One year ago, we expected the Indian
economy to show signs of better growth in FY99 - but this may be the worst
year and now we can only hope for a better economy in FY2000 picking up
steam as it heads into FY2001. Our expectations for a good FY99 were based
on the assumption that political stability (which translates into economic
stability and job stability) will encourage the Indian consumer to spend
and that this consumption will drive the Indian economy forward. The global
slowdown, we felt, was "good for the Indian consumer" as prices of products
would decline and increase purchasing power. The 18% fall in the Indian
rupee has negated much of those potential gains to the consumers and, unfortunately,
we are still looking for that political stability that will give the consumer
his job stability.
Meanwhile, even in tough times there
is an opportunity for money to be made. Just choose the right sector, and
back the right management.