Indian corporates are gearing up to meet and counter unexpected challenges from the changed global economic scenario. The situation remains grim, as most nations of the world (except China and India) are expected to register negative growth.
The situation demands a paradigm shift from the outward looking strategy of the last half decade. Between 2003 and 2008, Indian acquisitions activity (domestic as well as overseas) had grown at a CAGR of 55%; sectors like steel, cement and auto ancillaries witnessed significant capacity acquisition and build-up, to leverage on the booming local and global economy. The theme was expansion, diversification and acquisition. Today, Indian corporates are increasingly taking an introspective stance as they grapple with the new market realities – demand destruction, liquidity shortage and bankruptcy.
Focus on core business has emerged as the new mantra and and divestment of non-core businesses has acquired importance. In a recent Ernst & Young global survey covering 360 large companies, more than 53% respondents believed that they are likely to consider divestments for various reasons; 68% of Indian respondents cited need to focus on core business as a major factor. The strategy may be in greater part driven by liquidity constraints. Most of the recent divestment moves are in effect efforts to infuse cash into the system. Divestment decisions may however need wider consideration. Sellers admit that this perhaps is the worst time to sell where there are few buyers and every company on the block is evaluated as a fire sale and only good assets make the grade with buyers. It is therefore imperative that companies consider wider ranging solutions to address problems.
Leveraged buyouts by notable Indian business groups are a particular cause of stress and even distress. Acquired at peak valuations, banking on the growth in European and the US markets; and once financed by the now limping global banks, these have emerged as potential disasters for Indian groups. With the collapse of the developed markets, cross-border acquisitions have caused serious operational and financial stress. Overseas acquisitions in the automotive space are notable examples where outlook is bleak and valuations have plummeted. While, serious problem cases such as these may call for pragmatic look at the valuations vis-à-vis the cash losses it would incur over the next 24 months and the ability of the group to bear such a loss.
Companies are adapting different approaches to increase core business focus – elements include revisiting fundamentals of the business model – by increased / proactive interaction with external stakeholders – customers, suppliers, bankers and service providers; attention to cash conservation/ savings and management; and balance sheet management through better asset utilisation and liability management .
Indian sponsors are taking the bull by the horn, taking a full hands-on approach; local Indian teams are being despatched to take charge of offshore operations and the “Private Equity” management model is on its way out.
Conserving cash and reducing costs has seen significant success. Efficient management teams have fast-tracked identification and closure of non-performing / high cost sites, transferring business to more cost effective locations and managing inventories better. Companies have been working with specialist advisor teams to streamline operations and reduce costs – it’s like everybody is spending their dollar as if it’s their last.
Need based financial and operational partnerships are also under serious considerations to acquire best skills to counter act the emerging difficult situations. Stakeholders appear to be more pragmatic in their outlook and are now happy to consider partnerships to achieve success.
Managing liquidity and the balance sheet is the other key lever. Given the Indian banking system has once again demonstrated its resilience; some Indian sponsors have the options to look at aggressively restructuring / deleveraging their offshore balance sheets. Indian banks are supporting viable companies seeking sustainable turnarounds by helping companies’ secure discounted pay-off on foreign debt besides also enabling corporates in securing much needed cash for one time restructuring charge to give a boost to the turnaround efforts. .
While many corporates have considered non-core divestments, these have more often supported an overall effort towards achieving a holistic solutions described above. The need to focus on core business is a shifting goal post; Indian companies need to continually and quickly assess options towards securing better efficiencies and focus on core business strengths.
