Global Financial Crisis & India
By Subhankar Das THE recent economic crisis, which originates in the USA, is being transmitted to almost every corner of the world like an epidemic, although economist thought that this dreaded financial turmoil will be a pandemic pertaining to only the USA. This financial tsunami has primarily three fangs which eventually engulf investment of investors’ worldwide. The first & foremost reason is the direct impact on the balance sheets of many FIs which invested in the mortgage backed securities & their derivatives that turned toxic following large scale defaults in the US housing market.
Second, the crisis has created a liquidity crunch. The USA firms seeking liquidity resources massively withdrew their investments in stocks also led local investors to pull back from the market. Both factors contributed to the tightening of credit. Reinforcing these factors was the return of the local firms, which had previously borrowed in foreign markets, to the domestic market. These firms saw the foreign markets suddenly dry up. The final source of transmission of the crisis has been the real sector now frequently referred to as the ‘Main Street’ in the USA.The financial crisis coincided with the creeping recession in the USA & made it worse. That has meant a cut in the US demand for imports from other countries. According to a recent report by IMF, the world’s GDP growth estimates have been cut to 3. 7% for 2008 & 2. 2% for 2009, which is significantly lower as compared to 5% achieved in 2007. Likewise, export volume forecast for the developing & emerging economies has been cut to 5. 6% for 2008 against the 9. 5% achieved in 2007. Even for 2009, the numbers are not impressive at 5. 3%.To large extent, the slowdown will be consequent to the sharp deceleration in imports by advanced economies such as the US, Europe & Japan among others. The picture in India although not as gloomy as in the case of advanced economies is nowhere exciting. The global slowdown is likely to impact Indian companies, which export or have their business units in international markets. To give some numbers almost 13% of the total Indian exports go to the US followed by the countries like UAE, China, Singapore, and the UK & Hong Kong. Meanwhile Indian export which grew at about 30. % during April- September 2008 is already showing signs of a slow-down; the growth rate was down to 10. 4% in September 2008. And, while official numbers released by the Director General of Foreign Trade says that exports are already down by 15% year-by-year in October marking the first such occasion in five years. It is really a hard time to boost exports in the next few months as the global crisis has deepened hurting demand around the world. The weak rupee may help to improve the appeal of Indian products among other Asian exports but subdued demand means that there will be little realized benefit for Indian exporters.The moderation in external orders will hurt Indian business, which in turn reduce labor demand & weigh on consumption. Therefore, although India is relatively less trade dependent compared to its Asian neighbors, it is still exposed to external shocks. In this light expect tough times for some of them, which have a visible exposure to global markets. The hit will be an account of lesser volume, but could also mean lower realization. Companies which are dependent on the export markets or outsourcing will have a bleak future going ahead, the volume growth anyway is likely to decline on top of that the dollar rate will come down.Thus, companies will have to keep on reinventing themselves. The effect of this financial turmoil on various industries is described as follows. ? Apparel & Textiles: – The woes of the textile industry just don’t seem to end. While last year it was the rupee appreciation that affected textile exports, this year the weakening of demand in recession struck US, Europe & Japan is expected to impact export growth significantly. The case is similar for apparel exporters. The cracks have already started showing. Apparel Export Promotion Council (AEPC) has estimated that exports may drop to $8. 8 billion in this fiscal, 24 % below the target set by APEC for FY09. (Last fiscal , India had exported garments worth $9. 69 billion). This despite the fact that rupee has deprecated by more than 20% against the dollar in the current fiscal is worrisome. ? Auto: – The global meltdown has also pierced its teeth into the auto sector with a significant exposure to developed markets. Auto sales across categories in the world’s 2 largest markets, the US & Europe were down 16 % & 19% respectively for the quarter ended in September.Notably for companies like Tata Motors which derive a significant chunk of their consolidated revenues from outside the country, the slowdown will lead to a dip in revenues in the short to medium term. Bajaj Auto & TVS Motors are much less impacted as emerging markets continue to show healthy growth due to low 2 wheeler penetration. In the passenger car segment, Maruti Suzuki is trying to take a leaf out of Hyundai i10’s success in the export market & is pinning its hopes on the recently launched A-Star, which it expects will deliver in a phased manner, annual exports of 2 lakh units by FY2011.Tata Motors has seen a 20% dip in exports in the current fiscal (till October) due to global economy slowdown. Even for its subsidiary JLR retail volumes dropped 5% for the first 9 months of the calendar year despite of increase in sales of the Jaguar cars on the back of the launch of XF model. Tata is also planning to cut around 5000 jobs in JLR. So for the short term JLR would have to increase its focus on its high growth markets of Russia, China & Brazil on the face of drastic decline in sales from its two largest markets the USA & Europe.For now, the slowdown of demand in domestic & overseas markets of Tata Motors has downgraded & the company believes that the outlook will continue to be negative for India’s largest auto company. While the demand in developed markets continues to be weak, lower commodity prices (steel, crude oil), lower interest rates & a depreciating rupee could improve the outlook for players in the sector. Overall, the outlook is positive for 2 wheelers but neutral to negative for others. ? FMCG: – The FMCG sector is largely a domestic consumption story with exports contributing around 4-5% of total sales.However for companies like Tata Tea, Dabur & Godrej Consumer, the contribution of their overseas subsidiaries is significant (>20% of sales). These companies haven’t observed any slowdown from their international operations. According to the sales report of these companies, the international business is in fact the fastest growing business division within the domestic growth rate. The companies would grow in these markets with continuously introducing newer products & entering newer Geographic. Dabur’s main importers are the Western Asia & Africa, thus relatively immune to any major recessionary fears in the developed orld. Even Godrej is also doing a relatively good show in this time of recession. ? OIL & Gas: – Only 2 companies Reliance Industries & Essar Oil export a good chunk of their production. Essar’s share of exports was around 28% of the total sales in Q2 of FY09, while for reliance (55% of sales), Europe contributes around 20% of the total exports. The slowdown in global demand as well as the recent additions in the refining capacity has resulted into margin pressure for the refining business. The deep analysis of RIL speaks that it will face margin pressure, but volume growth in the exports market is still intact.For Reliance overall: volume growth in FY10 in the form of commissioning of Reliance Petroleum’s refinery & gas production from its Krushna- Godavari basin would provide cushion, which is also a reason why analysis have put a buy on the stock. ? Metals: – Many metal companies have spread their presence in international markets by way of exports & through acquisition in the past few years. In fact, Hindalco & Tata Steel has acquired companies that are significantly bigger in size as compared to their own size.Although, these companies (TISCO, Hindalco & Sterlite Industries) are among the low cost metal producers, the global slowdown is already hurting. Lower global prices have already forced many companies to cut production & prices. From this the stock prices have suffered, but most of worries are already factored in already. Among ferrous companies, Tata Steel on a standalone basis (5. 6mn tone capacity a year) generates about 20% revenues from exports, but factoring its global operations such as its UK- based subsidiary, Corus (21. 1mn tone a year), the revenue from foreign operation will be about 80% of the consolidated turnover.In line with the slowdown in the European markets, steel majors such as Arcelor Mittal & BaoSteel have already cut production. Corus too is cutting production by 30%. According to estimates, steel consumption in Europe alone will decline by 20% & 15% in 2009 & 2010 respectively. The picture of Tata Steel is changing from stable to negative, reflecting the challenging operating conditions in the UK on the back of likely deterioration in demand in Europe & the UK over the next few months. ? IT: – The spending on IT in developed economies is likely to decline by 5% in 2009 according to Goldman Sachs report.This does not sound good for IT industry in India, which get more than 80% of their revenues from these markets. It is not surprising then that the Indian IT poster-boy, Infosys has reduced its FY09 dollar guidance to 13. 1- 15. 2 % (as compared to 19-21% at the start of FY09), which is an early indication of things to come. Apart from the sluggish growth in the BFI sector, which accounts for close to 30% of the top line of many Indian IT players & delayed budgets, they now have to grapple with the issue of cross- country headwinds.This is a challenge for Infosys & Satyam in the form of depreciating value of USD as compared to Euro. While TCS & Infosys are on track on their hiring process, others are trying to downsizing. Also the changing political scenario in the USA & the coronation of Mr. Barak Obama as its 44th President gives speculation about the stoppage of outsourcing to Indian IT service providers, which will eventually hamper the IT Cos. So, broadly we can say that India is slowly coming out from the tentacles of global financial medusa.Thanks to the former RBI governor, Dr. Y. V. Reddy, India almost entirely escaped the devastation of the financial sector wrought by the crisis in countries such as Korea. On the positive side, we can take some comfort in the thought that the current crisis is not about to turn into the Great depression of the 1930s. Also the Finance Ministry has also brought out 2 stimulus packages for the Indian Inc. This coordinated effort of all the players concerned will definitely help the Indian industries to withstand this global financial turmoil. Thank You