India Inc Needs A New Road To Growth: Study
Between 2010 and 2015 the net profit of India's leading companies as a percentage of GDP dropped from 4.1 per cent to 2 per cent, according to Kanvic Consulting
India Inc has suffered a sharp decline in profitability over the last five years and businesses are struggling to get back to growth in an era of increasing macroeconomic volatility, high indebtedness and rising digital disruption, according to a study by Kanvic Consulting.
Between 2010 and 2015 the net profit of India's leading companies as a percentage of GDP more than halved from 4.1% to 2%, the report from Kanvic, a management consulting firm, found. In the same period the study found that EBITDA at these companies also declined from 8.7% of GDP in 2010 to 7.2% in 2015.
These declines have occurred despite the fact that India stands out as the world's fastest growing major economy, which paints a worrying picture of the state of corporate performance in the country.
However, while the overall scenario might look gloomy, there are significant bright spots. For example, there has been a remarkable shift in corporate profits in India between industry sectors. Today's top five most profitable industries captured a little under 39% of total corporate profits in 2010, but this leapt to almost 75% in 2015. The automotive, auto component, healthcare, utilities, and IT sectors have all made outsized gains in profitability despite the challenging growth environment.
Furthermore, even in the worst performing sectors like construction, there are companies that have grown above the median rate of the best-performing industries.
The Kanvic analysis found that there is a strong correlation between companies' growth rates over the last five years and their profitability. Those companies who grew their revenues most aggressively between 2010 and 2015 (i.e. at more than their industry's median growth rate) were more likely to see their profits increase.
"What we see is that despite the challenges, growth is both possible and essential if India Inc is to find the path to improved profitability," said Deepak Sharma, director of strategy at Kanvic.
The report identifies three major challenges to achieving growth: the increasingly volatile macro-economic environment, the high level of indebtedness and the rise of digital disruption.
"While the growth imperative is clear, many companies are struggling to deal with fast-paced, wide-ranging and unpredictable changes that are re-shaping the business environment in India," Sharma said.
"And this is not a temporary anomaly that may soon blow over, it is a 'new normal' that all businesses need to adapt to," he added.
As India has become more closely integrated into the global economy over recent years its exposure to volatility in exchange rates, commodity prices and capital flows has dramatically increased.
At the same time the pace of digital disruption has quickened. The country is now home to the third largest number of technology start-ups globally, and in 2015 the sector received 50% of the combined investment of all previous years.
Although this trend is most advanced in sectors like media, retail and transportation no sector is immune.
Sharma points out: "What makes digital players unique is their ability to quickly insert themselves between existing players and their customers, and build a platform that aggregates suppliers and consumers to build scale rapidly."
As well as the challenge of a harsh economic environment and digital disruption, Kanvic found that the financial health of almost one-third of India's top companies is either in a critical or vulnerable state due to high leverage and/or low interest coverage.
Furthermore, the proportion of companies stuck in the debt trap is still rising. As a result India Inc is less able to withstand the shocks of a more harsh external environment and invest in the drivers of future growth.
In light of these challenges, leaders need to focus on four fundamentals of success in the coming years, according to Kanvic.
"India Inc must first reset its assumptions to take account of the changed external environment so that they are developing strategy on a sound fact base. Second, executives need to make sure their organisation is fit for the future. For example, by transitioning to more fluid and less hierarchical structures that can more quickly respond to change. Thirdly, in light of rapidly emerging threats and opportunities, they need to advance with an agile stance that allows them to adapt on the move. Fourth and finally, every company needs to put digitisation at the heart of their strategy, regardless of their industry," Sharma said.
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