More Certainly Isn't Merrier

A coalition government at the Centre is now a certainty. That, says the Indianindustry, is the last thing it needs. Says Rahul Bajaj, chairman, Bajaj Auto:"Coalition governments by their very nature are more prone to populist pressure thatcould come in the way of taking decisions." And quick and hard decisions are the needof the hour. Swimming through one of its worst phases in recent times, industry hasclocked a puny growth of 4.7 per cent in April-December, 1997-98. That’s exactly halfof what it achieved in the three-quarters of last year, in itself a dismal one. And theworst may be still to come. Adds Ramesh Panicker of Lloyds Finance: "There is adefinite lack of confidence in the market, so any government that gives stability will bewelcome."

 If 1994-95 was the year of enthusiasm and expansion, 1995-96 caution andconsolidation, and 1996-97 of crisis of confidence, then 1997-98 would be the year of rudeshocks and storms. Few companies have been able to escape the impact of declining assetvalues, slowing consumption, soaring interest rates, rising inventories, export slump,rickety infrastructure and increased competition. "Virtually the entire industry ison the auction block," say Jayant Dang, managing director, Escorts Finance. And as ifthis was not enough, the country now faces another cobbled-together government with aninbuilt chaos mechanism.

Even the high and mighty have fallen. Take the case of denim giant Arvind Mills.Overcapacity in the domestic market and slack export performance has resulted in a massivepile-up of fabric. It is likely to downscale its targets of production from an increasedcapacity of 120 million metres. Despite price cuts, sales of around 27 million metres thisyear are likely to be only a notch above the 26 million metres last year.

At car giant Telco’s Pune-based plant, the inventory pile-up has led to a cut downon its assembly line work shifts. Market sources say the company is offering virtuallyunlimited credit to dealers for its trucks. The Modis, the Birlas and the Thapars aredisposing of assets and assessing businesses in terms of cash flows and profits.

Cash flows and profits are the new buzzwords as they are the hardest tocome by. "With the elections and rise in deposit interest rates, consumer demand hasfurther slowed down, resulting in an increasingly stringent cash-flow situations forcompanies," says Vijay M. Crishna, managing director, Godrej-GE Appliances."Dealers have not been paying for over six months," says B.N. Garudachar, chiefmanager, Voltas. The company has opted for an alternative route to beat the recessionarytrend by becoming a supplier for other white goods makers Electrolux and LG and bypromoting new brand identities in the commercial refrigeration market.

The number of court cases filed by banks and FIs against corporates forrecovery of dues is on the rise. American Express recently hauled up Core Healthcare fornon-payment of dues. ICICI has filed a winding-up petition against ParasrampuriaSynthetics for non-payment of dues worth Rs 120 crore. The debt recovery tribunals areflooded with appeals—some 75 cases come up for hearing everyday just in Delhi. Inmany cases, the FIs are working out financial deals for longer moratoriums on principalrepayment and waiver of interest payments.

The credit squeeze cuts across industry sectors. "Hammered bydeclining business on one hand and creditors deferring payments on the other, transportersare not buying and auto financing is down to a trickle," laments Panicker ofLloyd’s Finance. The cost of funds for finance companies has increased from 2.5 to 3percentage points. The last straw was the recent RBI stipulation restraining companiesfrom accepting fixed deposits till they attained capital adequacy norms.

 In the inter-corporate deposit market, rates have hardened."Rates were around 10 to 11 per cent six months ago. Now they are up to 16-17 percent. Besides, the only ones active in the market are a handful of companies with highcredit rating," points out broker Ganesh Hemdev. Forcing cash-strapped small andmedium-sized companies already hit by the risk-averseness of banks and the comatosecapital markets, to face a blank wall.

Many of these companies are up for sale. "For every business,there are 10 sellers and one buyer. Weak companies are being swallowed up by the strong;the Indian by the foreign," points out Atul Sud, MD, Strategic Capital. Mergers andacquisitions have become the order of the day, many of them coming up as part of survivalstrategies. And when corporates are not restructuring, they are turning to more desperatethough innovative means to cope with the crisis.

 PRICE CUTS: Everything from cars to textiles to cement isbeing sold at a discount. Korean giant Daewoo recently made news when it cut the price ofits car Cielo by a hefty Rs 140,000. Sales have tripled over the next month as a result.Others are looking at discount deals to dispose of inventories. Arvind Mills has droppedthe price of its volume seller from Rs 105 to Rs 95 per metre. Cement companies have cutprices by 15 to 20 per cent over the last one to two years. Cement giant Larsen &Toubro has cut down the delivery price of its 50-kg bag from Rs 169 in 1996 to Rs 146today.

 FREEBIES GALORE: The cement companies’ aggressivedrive to spur offtake could put to shame the efforts of the most savvy consumer goodsmultinationals. Gujarat Ambuja is offering its dealers an everything-paid-for holidaypackage. The dealers also have a choice of picking up shares of the company. Not to beleft behind, L&T has launched a 15-month gifts scheme. What was earlier a marketpromotion exercise used periodically by consumer non-durable and white goods industries isnow becoming a desperate means to exhaust stocks

. BARTER DEALS: Last fortnight, vendors for the cash-strappedPAL-Peugeot found a unique way to collect their outstandings. They asked the company tosupply them with cars against the amounts outstanding to them for supply of autoelectricals, fasteners, brakes, wheels and so on. The pay-in-kind settlement would enablePAL to dispose of stocks which, according to market estimates, stand at some 1,000-oddcars including different models of the Peugeot and the NE-118. Vendors have found this aunique way of retrieving their outstandings on which they had lost hope while enablingthem to meet their executive requirement of more vehicles. PAL-Peugeot’s outstandingsto its 200 vendors—among them are Sundaram Fasteners, Brakes India, Lucas TVS andVijay Jyot—run up to Rs 35-40 crore.

CASH IS KING: Television companies like Baron International,marketers of Akai, are using the tight liquidity position to wangle the best rates fromsuppliers by offering cash upfront. "Every supplier is ready to drop prices by 5-6per cent for ready cash," says Kabir Mulchandani, chief executive. The company isdropping prices to boost volumes. In Punjab, an Akai 21-inch set is now going for Rs6,990. In Delhi, the ultimate offer is a 21-inch set at Rs 22,990 with a similar set free.Videocon is offering 3 per cent cash discount to dealers to clear October bills now.Cadbury Schweppes is sticking to its cash-on-delivery system even if it means increaseddistribution hassles of half-truckload consignments and committed 24-hour deliveryschedules. Says Ashok Jain, chief executive, Cadbury Schweppes: "Our franchisees arefeeling the pinch. Suppliers aren’t giving them credit for raw material and they arecutting down inventories to less than one-fifth." Alcoholic beverage firms too arecutting margins and adhering to the cash-and-carry system, says Rajesh Srivastava,vice-president, DCW Home Products. In a tight market, lenders are obviously a more worriedlot than the borrowers.

ASSET SALES: As asset values shrink, the traditional industryfixation with property and factories as a means of amassing wealth is under attack. Thejack-of-all-trades family houses with positions in everything from glassworks topharmaceuticals and telecommunications are undergoing a change of focus, thanks to theliquidity crunch. Core Healthcare has put its formulations unit and captive power plant onthe block, in a bid to pay back outstanding loans. Indo-Zinc, an Indore-based company hasput up its Rs 200-crore cement project under construction in Rajasthan for sale."With the continued slump in the market and adverse showing by the company’score business, there is no alternative but to dispose of the cement project on an outrightbasis or look for a joint partner," said managing director Sanjay Agarwal.

Elsewhere, companies are closing down factories to meet the crisis.Tyre maker Ceat recently suspended work for 11 days at its Bhandup plant in Mumbai, whereover one lakh tyres are waiting to be picked up. The situation is so acute that insurancecompanies are wary that the slack demand may lead some corporates to deliberately burntheir piled up inventory and claim insurance against the damage to mobilise workingcapital.

Many see in these troubled times a correction of the past overoptimism and excesses."Companies have been gorging on cheap loans and unfocused diversifications. Now theymust pay," says Sud. "1995-96 was a very good year for business. Everyone mademoney. Now we are witnessing the underbelly of the cyclical process of markets," saysPanicker. But many see in the present crisis a failure of as much government policy ascorporate strategy. "A major problem facing industry today is that savings and moneyare not moving into commercial credit expansion or infrastructure or capitalmarkets," says Dang. "What the government needs is bold measures like permissionto provident fund trusts to invest in private sector equity and bonds dedicated toinfrastructure. Right now, the entire corpus of Rs 60,000 crore is locked in governmentbonds and securities.Infrastructure investment will create a broad-based demand for goods,encouraging capacity expansion by the private sector to provide sustainable industrialgrowth," he adds.

The industry at this stage can ill-afford any kind of soft-peddling ofeconomic issues. Says S. Raghuraman, secretary-general, ASSOCHAM: "Coalition or not,the government’s first task would be to kickstart the economy with policy changes ininfrastructure, labour laws, urban land ceiling laws and company law." Will thishappen with a coalition concerned more with its survival than the economy’s? Panickeris hopeful. "I think the economic indicators will dictate the political events,"he avers. Across India’s length and breadth, industry watchers will be keeping theirfingers crossed over that singular hope.