India Inc optimistic about growth; Ernst & Young Survey

• At least 10% growth in businesses expected for FY10 by 46% respondents
• Three-fourth respondents report only a low to medium impact of downturn
• Cost reduction, hiring freeze, commodity and forex risk management dominate corporate agendas
• Term loans from banks, debt/equity from group companies emerge as preferred means of raising capital
• Majority expect consolidation, 47% believe assets are undervalued

Mumbai/ New Delhi, 5 May, 2009 : – As the recent fourth quarter results of India Inc have demonstrated, not the entire corporate sector has been equally affected by the downturn. In a latest survey of 121 c-suite professionals by Ernst & Young, titled “Opportunities in Adversity: India Inc’s response to the financial downturn” only 25% of the respondents reported a “high” impact of the slowdown, with three-fourth experiencing a “low” to “medium” impact.

Reflecting confidence in corporate prospects, 42% of the respondents have said they would achieve 90% of their targets for FY09, while 43% are looking to meet 70-90% of their targets. Only 15% said that they will not attain more than 70% of the target. On the business outlook for the coming year, nearly half (46%) the respondents indicated that they will achieve atleast 10% growth for the period ended 2010, though in a related question, 65% said they expect the slowdown to continue to upto at least two years more. Nearly a third of the sample (27%) think that the duration of the slowdown would be 6-12 months.

“The last few months have been extremely tough and we have seen an increasing number of companies respond to these challenges with a slew of measures. Organisations are relatively more optimistic about their own prospects as they have greater influence on their own performance, while they are more cautious on the macro-economic outlook as it is dependent on many additional factors, “ says Sunil Chandiramani, Partner & National Director – Markets, Ernst & Young.
The intensity of the slowdown has clearly varied. Nearly three-fourth (72%) of the respondents said they faced increasing pricing pressure from their customers, while 66% strongly indicated that there has been a slowdown in order bookings. Around 56% encountered greater time lag in obtaining orders, with a third of the orders being cancelled. More than half (52%) are seriously rethinking expansions and forays into new markets, while 38% said they were strongly reconsidering launching new product offerings.

Reducing operational and people cost
Cost reduction, cash generation and liquidity have been at the core of corporate India’s response to the downturn. A substantial 85% of respondents informed they have given the highest priority to cost reduction to deal with the downturn; while 71% have re-evaluated their business plans with the focus shifting from growth to preserving cash.

More than three-fourth (76%) said it was their supply chains which were the most likely to be explored from a cost-reduction perspective, 57 % voted for infrastructure support services such as real estate, general administration; followed by advertising and promotions, where 51% have effected cuts; and 46% have clipped sales and distribution costs.

On managing people costs, 69% of the respondents laid “high” emphasis on rightsizing (not to be read as lay-offs), such as redeployment, workforce sharing etc, while a sizable majority (61%) indicated a “high” possibility of a hiring freeze. Equally good numbers of respondents shared that they are adopting measures such as internal redeployment, reducing labor cost (salary, bonuses etc) and relocation. Around 71% of the respondents gave “medium” to “high” priority to reducing labour costs such as salary and bonuses.

The survey says that while companies are exploring the option of containing manpower costs, this poses a severe threat of an adverse impact on the motivation levels of organisations’ critical talent as well as their retention. The need is to sharpen the linkage between individual performance and variable pay, highlights the survey. In this context, it is interesting to note that 61% of respondents gave “low” preference to reducing or eliminating training and other costs related with employee programs,

Says Sanjay Chakrabarti, Partner, Markets, who led the initiative, “ leading companies must strike a balance between improving operating efficiencies and revenue growth and between cutting costs and investing in talent and process improvements to prepare for the future.”

Treasury and financial risk management
Underscoring the vital role played by treasury and financial risk management, 85% indicated that enhancing cash and liquidity management helped deal with the downturn more effectively. Companies have increasingly looked into alternative sources of liquidity, inventorying of all debt covenants, monitoring compliance and considering options to renegotiate covenants, obtaining access to short-term finance facilities or credit, and communicating proactively with lenders.

About 62%, led by the IT&ITES segment, gave “high” weightage to foreign exchange risk management. Respondents from the manufacturing sector stressed on an effective price risk management system.

According to the report, the need for commodity risk management is now being felt more than ever before. Today, there is still widespread lack of capabilities. Further, governance of the commodity price risk management function is critical to ensure that risk management is always consistent with the risk philosophy and appetite of a company. This requires continuous involvement and oversight by the senior management, risk management committee and the board.

In preferences for available financing options, the capital market and private equity are mostly out of favour with only 10% and 20% respondents choosing these options respectively, as compared to term loans from banks (69%), debt or equity from group entities (61%) and mezzanine finance, which gives lenders the right to convert to ownership in case of loan default (37%), being rated as the more preferred choices.

Majority expects consolidation; believes assets are undervalued
A majority of the respondents (63%) expect consolidation and are looking at M&A (58%) as a strategic decision for business growth. Further, nearly half the respondents (47%) believe that the slowdown has resulted in undervaluation for their industry and 31% felt that assets were correctly valued. Yet, despite corporate leaders’ appetite for acquisitions and attractiveness of these assets, the lack of liquidity is currently hindering transactions.

The non-availability of leverage options has curtailed cross-border acquisitions significantly and with the global economy slowing faster, Indian companies have become more cautious. On the other hand, inbound M&A is expected to pick up as multinationals look to expand their presence in the Indian market, which could still achieve more than 5% growth.

“We expect changes in the way deals are financed and executed. With low leveraging ability, promoter contributions becomes more important, and banks may require additional comfort from borrowers. Maximum debt levels are likely to 2.5/3 times EBITDA (post acquisition) as compared to levels of 4-5 times, structured through a range of debt instruments. As capital is rationed, there could be instances of partnering other investors and with the volatile market, due diligence required prior to the deal is likely to rise,” says the report.

The report further adds that M&A activity is likely to be dominated by all-share mergers. PE investors will become more selective focusing primarily on listed companies, which can deliver immediate profits.

It adds that distressed sales are likely to go up on account of exit from non-core assets, managing of upcoming FCCB redemptions and shares pledged by promoters to raise funds, which may be off-loaded either in the market or to other strategic buyers if promoters fail to meet their obligations.

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