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Happy days are here again! Industry on upswing

Nikhil Faleiro in Bombay

"An increase of 156 per cent in profits through better resource utilisation," proclaims the advertisement of a company that has just released its annual results for fiscal 1997-98. And this is not the only company that is trumpeting to all and sundry that the dark days are over.

'True Worth -- that's what we are all about' says the advertisement for the Rs 14.45 billion Housing and Development Finance Corporation that has just declared a profit of Rs 2.93 billion, a full 18.34 per cent change since last year.

While the above two statements may not be the gold rush that corporate India is looking for, there is no doubt that the financial results of 87 companies declared so far clearly indicate that the nightmare of the last couple of years is over. For corporate India, the past 24 months, where recession loomed and threatened to affect productivity, is now a matter of the past.

Industrial production declined from 10 per cent in September 1997 to 5.9 per cent in January 1998 and demand for consumer products had fallen. Agricultural output growth had declined, despite a normal monsoon, thereby reducing rural demand, while the Asian financial crises hit most companies.

With little sign of recovery from an extremely disastrous 1996-97, when profits after tax of corporate India slipped by 10.3 per cent and with the fall in consumer demand, analysts anticipated a further decline in profits for 1997-98.

Instead, there has been a change. Annual profits have gone up 30 per cent, compared to last year's decline of 33 per cent, while sales increased 19.8 per cent whereas in 1996-97, it was just 14.8 per cent.

Analysing the turnaround, Jyotivardan Jaipuria, vice-president, Merrill Lynch, says, "The main reason why companies have performed so well this year is that each one has undergone a cost-cutting exercise. Realising the mistakes of the past they have not spent money foolishly on non-viable projects but have stated saving, which is a good sign."

These cost-cutting measures combined with a severe restructuring programme have ensured that companies's profits have shown an upward trend.

Adds S H Khan, chairman, Industrial Development Bank of India, "Despite the industrial slowdown last year, corporate results have been extremely good and this can be attributed to prudent spending by companies."

According to a Centre for Monitoring the Indian Economy study of 88 companies that declared their results for 1998, it was found that a healthy growth of 20 per cent was accompanied by a 30 per cent rise in net profit. This is in sharp contrast to the dismal performance in the last financial year when net profit declined by an alarming 33 per cent. Accompanying the decline in net profit last year, sales also grew modestly by a mere 15 per cent.

This remarkable recovery has not been restricted only to the private sector; public sector enterprises too have performed well and contributed in equal measure to the notable rise in profits this year.

Another remarkable aspect becomes clear when one compares the second half performance with the first half. During the first half of 1997-98, growth in sales of the overall manufacturing corporate sector was around 10 per cent. Thus, the 20 per cent growth for 1997-98 only shows a tremendous surge in sales during the second half.

Mahesh Vyas, executive director, CMIE, also attributes the improved performance to three factors. "The rise in profits this year is due to decreasing labour costs, reduction of overheads, and a major restructuring of the companies," he says.

Cutting costs, considered unthinkable in the past, is the new mantra. Companies now realise that unless strict internal cost-cutting was undertaken, no amount of strategies or measures will be sufficient to save the company from sinking like the Titanic.

The severest cuts have been in the regions of overheads. This can be attributed to a lower aggregate expenditure that grew by a lower 14.9 per cent to Rs 384.69 billion during 1997-98. In addition, the cut in corporate tax rate from 40 per cent to 35 per cent also helped improve the bottomline.

Another noteworthy factor is the sheer resilience of Indian companies to beat the odds. Despite recession in the automobile industry, automobile giants like Maruti Udyog and Bajaj Auto have still managed to post good profits.

For instance, the Pune-based Bajaj Auto scooter giant showed a profit of Rs 4.64 billion as compared to Rs 4.41 billion last year, a rise of 5 per cent. And this, in spite of a fall in production of two- and three-wheelers by six per cent to 1.35 million units as against 1.44 million in 1996-97.

Says Rahul Bajaj, chairman and managing director, Bajaj Auto, "We studied the market and decided to have a better product mix for our customers which saw a two per cent increase in sale prices."

Still, there have been some companies whose sales have increased but profits have been hit badly due to the Asian crisis. Indian Rayon and Grasim, both of the Aditya Birla Group, are two such companies.

"The sluggishness in prices and the South-East Asian crisis had an impact on our profitability," says Shailendra Jain, president Grasim Industries, "But higher production helped Grasim maintain operating profits of Rs 5.75 million despite the overall sluggishness. Now, with the revival of the economy, we expect volumes to rise even further."

Dawn seems to follow the darkest hour, with major units in the steel, automobile, and cement sectors poised to show equally good results. Headlines during the earlier part of this year -- 'TELCO turnover down 10 per cent', 'Hindalco sales down 20 per cent', and 'Larsen & Toubro sales scaled down by 25 per cent' -- may very well be words of the past.

Says Sunil S Bhandare, chief economist, Tata Services Limited, "This is an indication of the good things to come."