BOMBAY, 14 October — The past fiscal 2001-02 has been worse than a nightmare for the Indian industry. But despite this, there have been many companies which have emerged stronger than ever and have managed to buck the trend very successfully. When the going gets tough the tough gets going, this has been more than proved to right by India Inc.
Actually, the dire straits forced the companies to don their thinking caps. When revenues were not increasing, then what was the best way to improve profits? By cutting costs. And the initiatives undertaken include not only reducing raw material and power costs but also the existing debt burden.
According to a survey conducted by the Center for Monitoring the Indian Economy (CMIE), covering 935 listed manufacturing companies, gross sales growth has slowed to 3.9 percent, which is significantly lower than any time in the last five years while net sales grew at just 4.2 percent.
The sharpest reduction in costs comes from the raw material cost element, which has gone down from 54.7 percent of sales in 1997-98 to 51.5 percent in 2001-02, a difference of 320 basis points. Based on the sample’s aggregate sale of Rs.2,745.80 billion, the saving works out to a whopping Rs.878.60 billion. Power costs have also come down from 7.2 percent of sales in 1997-98 to 6.7 percent of sales in 2001-02, presumably, on account of higher captive generation. An example of this is cement, where most units have achieved reductions in power used in recent years.
This is not all. Many are even working to reduce their existing debt burden. The data for 935 companies, reveals that the debt-equity ratio has fallen for more than 60 percent of the corporates in 2001-02.
The debt-equity ratio is arrived at by dividing the total borrowings by the net worth of the company. MNCs, especially, are apparently reducing their dependence on debt slowly and relying more on internal accruals.
Take the instance of ITC. Its debt-equity ratio has fallen from as high as 0.58 in 1999 to just 0.07 in 2002. Likewise, VST too has reduced its total borrowings from Rs.1.44 billion in 1999 to just Rs.180 million in 2002.
For Hindustan Lever (HLL), even though the debt-equity ratio was already low, it has come down to 0.03 in 2001-02 from 0.15 in 1999. Here again, HLL has reduced its bank borrowings from Rs.1.10 billion in 2000 to Rs.250 million in 2002.
Yet, at the same time there have been companies which have gone in for more debt. Electrolux increased its borrowings from Rs.920 million to almost Rs.4.00 billion. Gujarat Ambuja has raised fresh debentures/bonds worth Rs.3.72 billion in 2002. In the case of MRPL and SAIL, the reserves have taken a big hit, while the borrowings have gone up. Nicholas Piramal has picked a short-term loan of Rs.1.81 billion and raised commercial paper worth Rs.700 million.
But apart from this, what has also emerged is that though companies have managed to bring down manufacturing costs, the expenses on advertising and marketing have infact gone up. Sales costs are up from 6.9 percent of sales to 7.7 percent. Amongst the components, promotion costs have increased the most at a 16 percent compounded annual growth rate (CAGR) over the 1997-02 period. Advertising costs increased at a rate of 11 percent while distribution costs increased at 8 percent, roughly at the same rate as the increase in sales.
What this indicates is that there has been increase in the competition while the markets continued to remain sluggish.
Another point to be noted is that operating efficiencies have improved due to falling interest costs and the working capital cycles are also down, implying that funds which had been blocked there have been released.
What the survey has also revealed is that companies are relying more on external sources for raising funds and are finding it increasingly difficult to rely on internal sources for their funding needs. In 2001-02, just 26 percent of the total funds raised by companies in the study, came from internal sources. This is a very sharp drop from the 48 percent that was seen just a year earlier.
On the borrowings side (excluding debentures and fixed deposits), there has been an outflow both from banks and institutions, to the tune of 4 percent. Due to the falling rates, companies have taken the opportunity to swap their existing high-cost debt for lower cost debt, resulting in savings on the interest front.
On the usage side, it is seen that corporates are deploying less in fixed assets and more into current assets. Compared to the situation in 1998-99, when nearly 74 percent of the total funds raised during the year was deployed in fixed assets, the usage has dropped just 49 percent in 2001-02.
There is no doubt that Indian Inc. has tightened its belts. And it is only this which has helped the companies emerge successful. There have been many which have fallen by the wayside but then, it is always survival of the fittest, isn’t it?