The betting is that the economy will continue to grow, but probably at a slower pace than the one experienced over the past 18 months. What will, however, hurt is this: prices of various products will be up and so will interest rates on a variety of consumer loans. A wide spectrum of consumables — especially, food items and other products of daily consumption — is already more expensive than, say, six months ago. A brutal increase in interest rates for a broad array of consumer product loans — such as cars and TV sets — has already slowed down sales of these items. People are also deferring plans to buy new homes.
So, how will the corporate sector respond when the juggernaut slows down? Will it increase prices till a low-cost competitor pulls the rug from under its feet or will it increase capacities to sell more? Many classical management and economic textbooks say that the best time to build capacities is during a downturn. The April edition of The McKinsey Quarterly has an article titled “Preparing For The Next Downturn” which looks at some of the practices adopted by companies that came up tops during the last recession.
The authors then distill a short list of common attributes that helped these companies prepare themselves and emerge as leaders during the dark days. These are: lower leverage on balance sheets, better control on operating costs, diversified product offerings as well as business geographies.
From the looks of it, India Inc’s creamy layer seems well in control of all the four parameters. Sure there will be some body-bag cases, but chances of survival for large parts of the corporate landscape seem pretty high.
Rule One requires that companies lower the leverage on their balance sheets during rough times. What this means is companies entering a slow-down with lower levels of debt have a better chance of surviving the slump than their peers and competitors. Fortunately, many Indian companies have already done this, thanks to a long-ish regime of low interest rates worldwide. Many Indian corporates took fresh loans at lower rates that they then used to repay the older and more expensive loans. Many when even a step further: they went to the market with an equity issue and used part of the proceeds to repay the entire loan. So, today large parts of India Inc looks squeaky clean.
There’s a corollary here. A clean balance sheet helps companies achieve greater financial flexibility. Especially, when during a slowdown the leaders are looking for acquisitions and lenders (typically banks) get extra cautious about lending. According to the McKinsey article, which is based on a survey of some 1300 US companies, the better performers clearly spent more on both capital expenditure as well as M&As during both lean times as well as boom periods. And, it was cleaner balance sheets that really afforded them this enhanced agility.
Corporate India seems to be well on track with the other three parameters as well. It used the intervening period to improve the productivity and efficiency of its manufacturing and service processes. What helped in addition was competition from global imports and products. Many companies also score well on the diversification of product offerings and business geographies — Tata Steel, pharma companies and the auto component sector have developed a global footprint over the past few years.
There’s one dark cloud though: how will the banking sector tackle the imminent slowdown? If the corporate sector has been able to emerge stronger, more resilient from the past few years, there might be a lesson in it for even the banking sector – a dose of globalisation could actually turn out to be a live-saver.