As Churchill’s grandiose dream of a United States of Europe lies in tatters, anxiety is looming over Indian companies with a significant exposure to the euro zone. The European Union is India’s largest trading partner. It consumed 18 per cent of India’s exports, as on March.
Companies have so far been putting up a brave front, claiming they have weathered similar storms in the past and have restructured operations. On the record, most claim their European order books are still growing or continue to be robust and they haven’t seen a scaling down of orders. A few cash-rich companies even have war chests in place for distressed euro zone assets, while others claim the geographical derisking started a long time back.
“So far, there is no impact. In any case, we have prepared ourselves by reducing our breakeven levels,” says Amit Kalyani, executive director of Bharat Forge, the Indian auto component major that relies on Europe for a third of its consolidated revenues. But, for how long? It’s still early days, and most CEOs and CFOs hope politicians will “bite the bullet of common fiscal management” and take strong measures like the ones undertaken by the US after the Lehman Brothers collapse.
Tata Steel derives 56 per cent of total revenues from Europe after the Corus acquisition. It has been in a continuous process of rationalising European operations. That has involved mothballing of plants, 7,000 layoffs, and debottlenecking. But it’s still a work in progress. The company is now investing in Europe to enhance productivity and focus on value-added products.
Most analysts reckon the sale of its ailing Teesside Cast Products subsidiary was an important landmark, as the unit accounted for a majority of the company’s losses. For the time being, the decline in input costs, likely to continue over the next two quarters, should ease the pressure on margins.
For metal rival Hindalco, with Novelis in its fold, the region contributes about 32 per cent of consolidated revenues from 12 rolled product plants spread across Germany, Italy, France and Ireland. It is one of the largest suppliers to the automotive and beverage can industries. Any long-term slowdown is bound to make these giants that much more vulnerable. For Suzlon, the figure is 43.6 per cent, shows data available for FY11. Significant, as Suzlon’s much-awaited integration with European arm RePower, is happening when the European economy is under stress.
“The order inflow in the first quarter at 237 Mw went down 50 per cent year-on-year. It has remained weak for two consecutive quarters,” said a report by international broking firm Macquarie. Suzlon has an order book of around 2,030 Mw and RePower’s order book is 2,710 Mw. While these orders might take care of 2011-12, the next financial year may be a worry.
All major tech companies have been diversifying into Europe to offset dependence on the US, still the principal market for most. For Infosys, Wipro, HCL and TCS, roughly a quarter of the revenues have euro exposure. It’s a little more than half for Tech Mahindra; BT alone contributes 40 per cent of total billings. Pharma major Dr Reddy’s has acquired assets in Germany (Betapharm) and thereafter has 36.6 per cent of total revenues from the region.
“Till now, for India Inc there is visibility of orders for the next couple of quarters. Most people don’t know how the situation will pan out. Personally, I feel it’s going to be a long, painful ride till 2013,” says the India head of wholesale banking of a British bank, on condition of anonymity.
The signs are ominous. In Germany, the region’s strongest economy, GDP growth fell from 4.6 per cent in March to 2.8 per cent in June. Consumer confidence dropped from 110 to 100 since January 2011. In France, GPD growth fell from 2.1 per cent in March 2011 to 1.6 per cent in June, and consumer spending in the manufacturing and retail sectors is decelerating. In the United Kingdom, GDP growth declined from 4.7 per cent in December 2010 to 4.6 per cent in March 2011. “The first impact of euro zone volatility is the depreciation of the rupee and different parts of the group react differently to it, depending on net exports or imports. Secondly, the cost of ECB borrowings goes up as availability of credit becomes an issue. Exports to euro zone markets also take a hit but as a group we have been diversifying into the non-euro zone, non-US markets of Asia, Latin America and Middle East,” points out Ajit Ranade, chief economist at the Aditya Birla Group, a $35 billion conglomerate.
Geographical derisking undertaken by most corporates should come in handy in the long run. “We are a global company, but two years back we made changes to focus more on the developing world. Developing countries and India are doing well. As much as 55-60 per cent of our order book comes from the developing world, 35 per cent from Europe and five per cent from the US,” Robin Banerjee, Suzlon’s Group CFO, said in a recent interaction.
RePower accounts for 40 per cent of Suzlon’s revenue. Fortunately, though, REpower has been receiving fresh orders and maintaining a decent order backlog. Hindalco too is betting big on newer demand centres from emerging markets. The European demand will pose a problem in the short term, but its operations in growing markets like India, Korea and Brazil will help it weather the storm once the expansions get streamlined. The $300 million expansion at Pinda, Brazil, is the largest for Novelis. Hindalco too underwent business restructuring. The relocation of the can body-making plant of Novelis’ Rogerstone from the UK to Hirakund in Orissa has been a calculated move.
For most of the Indian IT players, problems will escalate if the UK is in trouble. The UK alone generates half of their total revenues from Europe. The remaining half is from continental Europe.
However, Indian players are yet to make significant inroads into government contracts and the bulk of business they do in Europe is with the private sector, which typically outsources more to save costs when there are signs of an economic slowdown. Europe has been traditionally slower in terms of outsourcing and offshoring, as compared to the US market. “I do not think the euro crisis will have any significant impact for the Indian IT industry as they predominantly focus on the UK market and to some extent France, Germany and some Nordic regions. From a Mastek point of view, all our business comes from the UK. And, that market has not been impacted by the euro crisis,” says Sudhakar Ram, chairman and managing director, Mastek.
The UK is also a big hub for Tata Motors’ Jaguar Land Rover. In FY11, JLR sales that grew 25.6 per cent pulled the company out of a bigger crisis as sales in domestic Indian markets were lacklustre. JLR contributed 57 per cent of the consolidated sales last year.
Leading German luxury brands like Audi, BMW and Mercedes have also reported strong sales growth in units during August. That is giving Indian auto component players some hope. Most of them have had to prune workforce, mothball European plants two years back and are now hoping Germany’s auto industry can withstand the pressure.
“So far we have been growing in Europe. New orders worth 800 million euros are getting executed now,” says Pankaj Mittal, COO, Motherson Sumi System. The company recently acquired Peguform in Germany and has increased its European market share to 50 per cent. “But, we are also spreading our reach. Most of our new expansions are taking place in Mexico, Thailand, South Africa and India,” says Mittal.
