So far the most noticeable aspect of corporate results in Q2 FY09 has been that expenses are up and margins have shrunk. Over the next couple of quarters, revenue growth is likely to fall as the economic slowdown hits home. Global cues, and how quickly corporates respond to the slowdown in revenue growth with cost-cutting measures, will determine the direction of the stock markets, says Anup Bagchi, executive director, ICICI Securities in an interview with our correspondent.
What has been the impact of the global economic crisis on Indian corporates?
Broadly there are two types of impact on the market. Firstly, liquidity demand of FIIs in their own markets is leading them to sell their holdings here. Whenever there is liquidity pressure, selling can start defying valuations. This in turn leads to price correction. Rapid repatriation puts pressure on the exchange rate also. The impact on corporates is that outstanding overseas borrowings have become expensive. In addition, global liquidity is extremely tight for corporates because of the current global financial crisis.
The other impact is that it is becoming difficult for corporates to raise capital to support growth. And high interest rates are making borrowing expensive. Overall the cost of supporting growth is increasing rapidly.
What has been the impact of inflation?
During the last one year, inflationary pressure within the Indian economy was very high because of the high price of crude and food grains. So the central bank had to tighten monetary policy to moderate demand. As interest rates began to rise, capital-intensive industries — steel, cement, infrastructure and real estate — started having problems. Due to the rapid economic growth of the last three years, wages and rentals have gone up. So input costs of both capital- and labour-intensive industries have risen.
During the last three years, when the economy was growing rapidly, this did not matter as companies could pass on costs to customers. Though expenses grew, income also grew, and profits were maintained. Then the global crisis happened. This has resulted in a contraction in topline demand. With interest rates so high, demand for big-ticket items like cars and housing has been hit. And since the EMI burden of households has gone up, they have reduced all types of discretionary spending. This is going to impact the topline of corporates. This impact on topline growth is not visible yet. It will show