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The crisis triggered by the 2008 Lehman Brothers collapse separated the men from the boys of India Inc. The immediate impact of the crisis was a sharp and sudden decline in India Inc's earning potential. From 2003 to 2008, the earnings of India's top 50 companies, part of the Nifty 50 index, increased at a compound annual rate of 24.7 per cent. The crisis led to contraction in earnings for the next two years; when the economic recovery started in early 2009, earnings rose just 11 per cent annually from 2009 to 2013.
While this meant bad news for companies that had factored in high demand growth in their business plans, some of the strongest hands in India Inc managed to scale the highs of the pre-crisis era, thanks to sound fundamentals. Most of these companies hadn't leveraged their balance sheets or over-expanded capacity in anticipation of high economic growth. These included the likes of Tata Consultancy Services (TCS), Shree Cement, Lupin, Emami, Eicher Motors, MRF Tyres and Asian Paints.
In contrast, those who went on a borrowing spree in the boom years, anticipating unbridled growth, paid a heavy price when demand wasn't that high during the post-crisis economic recovery. From 2008 to 20013, the revenue of BSE 500 companies, excluding those from the financial and oil & gas sectors, grew 16 per cent annually, while profit growth was just five per cent, indicating the pressure on India Inc's profitability and balance sheet.
This forced many companies to resort to further debt to plug gaps in cash flows. Not surprisingly, the total borrowings for our sample of 312 companies, excluding oil and gas and financial sector firms, grew 22.6 per cent a year in these five years. As net worth grew just 16 per during the period, India Inc's balance sheet ratios worsened during the period.
Despite the tough growth environment, 37 companies managed to beat their peers on all growth parameters - revenue, profit and market capitalisation. Besides, their net worth rose faster than their liabilities, indicating now, they were much stronger financially than in the eve of the Lehman collapse. Tyre major MRF, for instance, grew faster post-2008 than in the preceding five years. Not only did its revenue nearly triple from 2008 to 2012, its profit and net worth also increased three times during the period. The case is the same for TCS and Titan Industries.
Experts attribute this to the conservative management styles of these companies. Since these hadn't stretched themselves in the pre-crisis era, they were in an advantageous position when growth resumed after 2009. "They didn't have the burden of debt repayment and could focus on grabbing market share from their troubled rivals," said Dhananjay Sinha, co-head (institutional equity), Emkay Global Financial Services.
Companies in sectors such as fast-moving consumer goods, consumer durables and pharmaceuticals gained from a general robustness in consumer spending, in contrast to secular deceleration in investment demand in the post-2008 period. But here, too, most of the growth was seen in the case of stronger companies.
"Companies with management rooted and focused on customers and low leverage tend to do better in a crisis compared to companies that are leveraged and diversified," says Sivarama Krishnan, director (risk advisory), PricewaterhouseCoopers India. "These companies that are stronger are likely to do even better in the post-recovery period, as these can take more risks and have greater financial firepower to grow faster," he added.
In contrast, companies that stretch themselves during a boom, either by way of unrelated diversification or leverage have to strategise on cutting losses once growth returns. "Many companies will be forced to sell assets and this would open growth opportunities for stronger hands in India Inc," says Dhananjay Sinha.
The acquisition of Jaypee Cement's Gujarat assets by UltraTech Cement is a case in point.
