Anecdotal horror stories about the global crisis abound. To get an independent view, I spoke with executives in some of the wide array of companies we advise. Unsurprisingly, I found a huge variance in how companies have been affected, and, interestingly, that this variance is not industry-specific.
Top of the pile, of course, is the pharma industry, particularly companies focused on generics. People will always get sick, it would seem, perhaps more so during a downturn. Both companies I spoke to in the generics space are concerned about the slowdown, but not to the point where they had cut their growth forecasts (of around 15%) for 2009-10. Again, and related in some ways, companies in specialty chemicals are doing just fine.
Some commodity companies have been affected very marginally, if at all. Sugar, for example, is “recession-proof”, in the words of one CFO. Across the soft-hard divide, a copper smelter I spoke with was actually very pleased with the way things are going since the substantially lower commodity prices reduced his carrying cost while his margin— the TCRC, as it is called— was only slightly affected. Fertiliser companies, too, are doing quite well, thank you, given that their raw material cost, carrying cost and subsidy value had all come down, reducing the pressure on their financing activities.
Another sector that is reasonably comfortable is engineering goods, particularly those companies focused on servicing India's infrastructure requirements. I spoke with three companies in this space and all of them, to varying degrees, are looking for growth in the 5 to 15% region next year-- the ones at the lower end of the range had a higher focus on the global market. They are all tightening their belts, of course, and keeping an eagle eye on liquidity.
IT companies, too, seems OK, except that mid-sized players are very concerned about the sudden drop in visibility. Even as recently as six months ago, they had comfortable visibility for at least a year— today, they can see out to just a quarter. Larger companies are, of course, better off and looking at low double-digit growth, on the belief that the financial sector, which has been the mainstay, appears to be through the worst of the crisis, judging from interbank lending spreads. Many IT companies are also looking to diversify sales, particularly into Europe, which spends as much on IT as the US. This will, of course, lead to greater cross-currency risk, which points up the need for further enhancement of risk management processes.
To my surprise, I even found a few companies in the textile sector that are not too worried. In fact, the best performer-- an integrated spinning to garments player--is looking to duplicate this year's 30% top line growth in 2009-10! Another is expecting flat growth, but only because it is limiting sales due to concerns of credit risk. Yet another is seeing the domestic market come to its rescue, and expects positive sales growth.
On the flip side of this largely no-real-terror story, I did find companies who are very, very nervous. The CFO of a large diversified group said (in so many words) that he was terrified. He is focusing all his energies on retaining liquidity. Another company in the auto parts space, which has a 3-month order book, which gets fine-tuned each month, said demand fell off a cliff in November; what is worse is that it has subsidiaries in Europe and is bracing for a very difficult couple of years. A third company I spoke to, a large commodity player, said that people are using up inventories and buying only when absolutely necessary, conserving cash; and, while there are some signs that domestic demand will pick up in January, he fears it is going to be very difficult for SMEs, many of whom will find the liquidity squeeze too difficult to bear.
In summarizing this straw poll, I have been able to detect a few patterns and ideas emerging.
First of all, there are survivors-- in some cases, winners-- in all industries. They are usually of a certain minimum size (greater than 250 crore), and have strategically refocused their businesses over the past decade or so. Most of them have a strong focus on systems and processes and have been relatively conservative in their use of financial markets— no exotic derivatives or FCCBs, please. Hardly rocket science— empirical evidence simply confirming the obvious.
Secondly, it is clear that the domestic market, weakening though it is, provides a critical balance to exports. Small exporters, whose 5-6% margins are dead in the water of 10-12% volatility, need to diversify into the local economy. The government should assist this process by accelerating infrastructure development, widening and smoothening the road for FDI, and creating better incentives for state governments to become more efficient.
Thirdly, the imperative of an active corporate debt market has become critical. While the road map for this has been in place for a long time, the recent drama points out the need to recalibrate the approach, particularly to ensure that its fundamental underpinnings— credit ratings— are delivered with full accountability and free of conflicts of interest.
And finally, everybody seems to be engaged, responding to the notion that a crisis is a terrible thing to waste.
