India Inc’s decade long strong 20 per cent compounded growth (2002-2012) is led by sectors that foretell consumption story of luxury-prone middle class.
The fast-growing sectors were air transport services, automobiles, housing construction, gems and jewellery, healthcare, retail and telecom services. The software services sector, with 30 per cent compounded growth since 2002 has financed the ambitious and well-educated middle class.
Spending on luxury needs strong infrastructure, and so, the capital extensive sectors led the gross domestic product (GDP) growth in the first eight years of the decade. Growth remained healthy for capital goods, construction, metals and steel in the first five years, while severe slowdown set in the last two years on account of debt-ridden US and European economy.
Growth, however, remained subdued for agri-commodities, fast moving consumer goods, entertainment and white goods sectors, indicating change in spending pattern of the wealthy middle class.
With the investment scenario turning worst for sectors that need consumption from rags and riches, corporate India's 20 per cent compound annual growth rate (CAGR) in revenue came through cross-boarder acquisitions worth over $110 billion. These growth sectors borrowed heavily through external commercial borrowings (ECBs) worth $104 billion and foreign currency convertible bonds (FCCBs) worth $7 billion.
Overall borrowing shot up at a 20 per cent CAGR to estimate at Rs 19 lakh crore so far this year. The cost of borrowings in 10 years consumed one-third of the profit earned by the manufacturing and services sector (ex-banks), in 2012.
Companies (listed sample), nevertheless expanded revenue base from Rs 9 lakh crore in 2002 to over $1 trillion or Rs 57 lakh crore in 2012. Net profit zoomed 44 per cent CAGR between 2002 and 2007, but profit growth slowed to 10 per cent between 2007 and 2012. The setback in profit growth is attributed to heavy borrowing in foreign currency through ECBs and FCCBs. The 27 per cent rupee depreciation since March 2011 added to woes with provisioning for mark-to-market loss of Rs 25,000 crore.
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The sectors that need consumption from rags and riches are now facing a tough challenge as investment spending suffered setback to control runaway inflation. A steep fall in projects under implementation and credit to the infrastructure sector indicates the capital formation in the economy had slowed substantially while a decline in the transaction money is signaling tempering consumption growth.
HEADING NORTH Sector-wise review | ||||||
Sectors | Sales CAGR | Net profit CAGR | ||||
‘02-’07 | ‘07-’12 | 10 yrs | ‘02-’07 | ‘07-’12 | 10 yrs | |
Auto Ancillaries | 25.89 | 15.46 | 20.57 | 64.74 | 11.45 | 35.50 |
Automobile | 21.91 | 29.59 | 25.69 | 80.82 | 33.82 | 55.56 |
Aviation | 29.61 | 22.95 | 26.23 | Loss | Loss | Loss |
Banks | 19.19 | 18.23 | 18.71 | 22.15 | 20.99 | 21.57 |
Base metals | 35.17 | 18.69 | 26.66 | 66.59 | 0.83 | 29.60 |
Capital Goods | 25.59 | 21.98 | 23.77 | 66.90 | 13.72 | 37.77 |
Cement | 23.87 | 17.39 | 20.59 | 257.47 | 2.05 | 91.00 |
Construction | 39.78 | 25.34 | 32.36 | 62.68 | -6.53 | 23.31 |
FMCG | 6.82 | 18.98 | 12.74 | 10.83 | 16.93 | 13.84 |
Gems and Jewellery | 31.44 | 27.90 | 29.66 | 71.02 | 31.88 | 50.18 |
IT - Software | 43.86 | 18.12 | 30.36 | 46.68 | 14.55 | 29.63 |
Oil & gas | 20.17 | 18.39 | 19.28 | 25.17 | 7.51 | 16.01 |
Paper | 6.48 | 13.27 | 9.82 | 58.24 | -21.55 | 11.42 |
Pharmaceuticals | 18.96 | 16.59 | 17.77 | 31.55 | 2.30 | 16.00 |
Power | 15.26 | 21.29 | 18.24 | 16.74 | 9.80 | 13.22 |
Realty | 30.40 | 14.43 | 22.15 | 255.50 | -6.34 | 82.48 |
Retail | 53.10 | 37.65 | 45.17 | 42.38 | -13.08 | 11.25 |
Steel | 27.07 | 20.94 | 23.97 | L to P | -2.64 | L to P |
Telecom | 29.97 | 18.82 | 24.27 | 42.83 | -37.87 | -5.80 |
L to P; loss to profit; Figures in % Source Capitaline |
The economy is now facing a severe slowdown, much sharper than a normal business cycle weakness, says Edelweiss analyst.
The growth in auto sector was phenomenal, with 10 year CAGR of 26 per cent in sales and 55 per cent in profit. The GDP growth moderation to below six per cent may hit the sector in 2013 with single-digit growth in sales and profit, expect analysts.
Auto companies had borrowed heavily with debt of Rs 53,000 crore up from Rs 13,000 crore in 2002. This increased their interest burden from Rs 1,350 crore to Rs 5,000 crore, accounting for almost one-fifth of the year FY12 net profit.
The capex slowdown is expect to hit capital goods segment, which grew at the rate of 23 per cent in 10 years. Interest burden had gone up five-fold in five years on account of three-fold rise in debts, resulting a severe hit in net profit growth rate from 67 per cent CAGR between 2002 and 2007 to 14 per cent CAGR between 2007 and 2012.
Aviation companies were badly hit by poor growth with net loss mounting to Rs 4,300 crore in 2012 from Rs 32 crore in 2002. Heavy borrowing, up four-fold in five years, increased interest burden by eight-fold to Rs 2,300 crore.
Software services firms, which made the well-educated information technology (IT) professional abundantly rich through fat salaries, is facing severe slowdown. The revenue growth for IT companies slipped from 44 per cent between 2002 and 2007 to 18 per cent between 2007 and 2012. During the same period the net profit growth rate too slipped from 47 per cent to 14 per cent.