Opportunities round the corner for India Inc

India is on a sticky wicket. Challenges in the form of fiscal deficit, trade deficit, weakening rupee, balance of payment, hard interest rates, inflation and subsidies and so on, are threatening to derail the economy.



Each passing day is also showing more evidence of potential sovereign debt crisis in Europe and US is still to recover fully from the economic downturn post sub-prime crisis of 2008. What does this imply for Indian firms? Can we expect any positive impact of the crisis on our economy?



Bucking the Trend



During such crisis, when world's big economies are struggling, some businesses in India are bucking the trend by diversifying into new areas and increasing exposure to the export markets.



Businesses have been able to benefit from the weakness of the rupee, and countries which were earlier not importing from India have started sourcing products from here because of competitive pricing. According to RBI, merchandise exports grew at a robust 20 per cent last fiscal, thus vindicating the advantage of a depreciating currency. This rise in exports would help Indian corporate.



Depressed rupee also bodes well for the outsourcing industry. It makes the proposition more lucrative. India continues to be the top destination for outsourcing. There is a pipeline of 249 deals worth $47 billion coming up for renewal in CY2012. This could convert into a $6-billion opportunity for Indian companies.



Conducive environment



The environment is also conducive for foreign players wanting to enter India. Of course, policy paralysis is a deterrent, but anyone who sees the current crisis as cyclical can reap immense benefits by investing at this juncture. In fact, according to E&Y, 202 mergers and acquisitions (M&A) deals worth $9.4 billion were recorded during January-March.



During the same period, India Inc witnessed 118 private equity (PE) deals worth $ 2.01 billion.



Sectors such as e-commerce (Flipkart raising PE Funding of $ 150 million) and domestic sectors focused on Indian consumptions story are attractive to foreign investors (Godrej PE fund raise $ 137 million from Temasek).



Nevertheless, falling rupee has adverse affect on the importers. Non-oil imports include gold, capital goods, coal, fertilisers and other metals. These comprise 70 per cent of total imports; imports are now more expensive which should encourage reverse substitution (lower imports, higher domestic production).



Effect on wages



Amid this discussion, it is noteworthy to stress the effect on wages. Express growth meant swift rise in wages.



For some time now, rising wages has been a sticky issue for Indian companies. Through 2000, corporates have seen an unprecedented rise in salaries and increments — 18 per cent to 20 per cent hike a year.



Although imperative to attract talent, high wage bill resulted in immense strain during the crisis period, specifically 2008-09. But, the current crisis is a blessing in disguise. Organisations are striving to take a balanced view in light of the vague economic environment. Recent uncertainties in the European economies will force the companies to play the hiring and hikes game with caution. In fact, excluding the pharmaceutical sector, all other sectors have witnessed lower salary growth rates y-o-y.



The slowdown will also reduce attrition levels. At present the employees are reluctant to switch jobs due to the inflationary trends and global economic scenario. They are willing to forego a salary hike in exchange of job security — a sure impetus for increased productivity!



However, depressed business activity means lower growth, which in turn translates into lower revenue; but there is a silver lining — this spiral has led to austerity being in vogue again. Cost cutting seems to be the sole solution. Starting from Government to big private sector, cost cutting is there everywhere.



Splurge will no more be the watchword and greed will no more be good in corporate parlance. Financial crunch will force the companies to eliminate all forms of wasteful expenditure and follow an austerity regime. This could bode well in general as it would help achieve better operational margins and profitability.



Our growth story is strongly hinged on internal consumption (exports contribute only 25 per cent of GDP). Couple this with a burgeoning middle class, the current mayhem presents significant opportunities. Given how well India has performed despite the global macro issues, consider how well it might do without them!

(The author is Co-Head — Institutional Equities, Emkay Global Financial Services. The views are personal.)

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