How companies are meeting the challenge

India Inc is responding swiftly to counter the pressure on its profit margins. A Citigroup report on India has shown how corporate India is innovating and adapting to the slowdown.

The report has listed several sectors that have been hugely impacted by demand recession, high cost of funding and increase in production costs.

EVENTS THAT MAY CUT RISK

Oil retracing to $100 or lower may help ease energy cost for companies

Lower inflation may help RBI reverse monetary measures

Good monsoons may help dampen inflationary pressure and ease agri-commodity prices

The PSU divestment plan may boost sentiment helping companies to tap the capital market

Construction
The construction firms have seen the cost of steel, cement, bitumen, which comprises 30-40 per cent of their total cost, almost doubling in the past six months. This has resulted in an overall cost escalation of 35-40 per cent. The interest rate scenario and the tight sectoral credit disbursement limits and ECB norms have added to their woes.

These firms are bringing in cost escalation clauses, back-to-back supply arrangements, and building in a buffer while bidding. For funding, many companies are now turning to private equity investment. In the case of public sector construction in highways, organizations are asking the government to increase the toll period. Larger companies are comparatively less affected as a majority of their orders are from government agencies.

Real estate
Real estate firms have witnessed rising construction costs and lower demand due to more expensive home loan rates. Moreover, most investors are postponing real estate purchases in anticipation of a correction in values. Many players are thus facing a dwindling holding power due to the oversupply in the market.

The real estate players have shifted to mid-income or mass-housing projects instead of luxury homes to increase sales volumes. To keep house prices affordable, they are reducing the size of apartments. Companies are now resorting to private equity or venture capital funding, which are available at project level.

Aviation
Aviation firms have suffered on account of higher prices of aviation turbine fuel (ATF) which comprises around 30 per cent of total operating costs. Moreover, prices in India are higher than global levels due to high taxes and duties imposed on ATF.

Aviation firms are now resorting to wage reductions, staff-downsizing and sector consolidation. To directly reduce ATF costs, airlines have resorted to route rationalization through reducing ground taxi time by choosing parking bays nearer the runway, taxiing planes on single-engine power, minimizing the use of auxiliary power units; reducing operating empty weight; and entering international routes which allow them to purchase ATF at lower prices.

Automobiles
Automobile manufacturers have witnessed waning demand in a tight policy environment and higher fuel prices. Auto finance is particularly difficult with loan disbursement targets being pared and banks discontinuing two-wheeler loans at the dealers' end. The sector also suffered from rising input costs (steel, aluminium, rubber) which they could not pass on to consumers due to fierce competitions.

The auto firms have now resorted to production adjustments, including trimming production during off-season, and shutting plants for a few days in a month. They are improving demand through discount schemes and attractive financing options. Reducing costs by redesigning components and cutting back on administrative costs are also being adopted by many companies.

Information technology
The information technology sector has been hit by global slowdown, particularly in the US. The exchange rate fluctuation and hedging of revenues have impacted their net earnings in the first quarter. The companies are now applying wage reductions and slowdown in hiring, apart from focusing on stable revenue sources rather than those where bill rates are typically high.

Consumer durables
The rising interest rates have also impacted the sales of consumer durable firms. Higher input prices, particularly for food and beverages, are also hurting the growth in the industry. These companies are focusing on private (in-house) brands, and offering heavy discounts to boost demand apart from cutting their wage bills.

Cement and steel
The demand for real estate has had a knock-on impact on this sector. Cement companies have been focusing on raising captive power capacity and increasing the proportion of blended cement. Steel companies are attempting to renegotiate contract prices to partially offset cost increases.