Corporate India on a roll
By Kunal Kumar Kundu

MUMBAI - The health of the Indian corporate sector seems to be like never before. The corporate restructuring undertaken in recent years and further opening up of the external sector have started yielding dividends through higher productivity and better balance sheet management. Coupled with a higher growth rate, the result has been astounding: for the first time in a decade, there has not been a single default by any Indian corporate during the first half of 2004-05.

During this period, India's premier credit rating agency CRISIL upgraded 25 companies, there was not a single downgrade. The Modified Credit Ratio (MCR), defined as the ratio of upgrades plus reaffirmations to downgrades plus reaffirmations, jumped to 1.28 in the first half from 1.05 during the same period in the previous year. In fact, all three ratings' segments - manufacturing, financial services and infrastructure - recorded an MCR of more than 1, showing that credit profiles improved across the board.

Even the ratings by ICRA (India's second largest rating agency) indicate improving fortunes. While they are yet to do transition analysis for 2004, available information suggests that total ratings assigned in 2003 witnessed a decline in downgrades and an increase in upgrades compared to 2002. There were 14 downgrades in 2003 compared to 31 in 2002. On the other hand, upgrades increased to 11 from eight. The inv-CR (ratio between downgrades and upgrades), which declined significantly in 2002 to 3.8, fell further in 2003, to 1.27.

A decline in downward revision of ICRA ratings is accompanied by a fall in the movement of investment grade ratings into the Non Investment (NI) grade category. Also, there have been no downgrades across category in LAAA (the highest rating) and LAA ratings in 2003. There was also a decline in the movement of LA and LBBB ratings into the NI category in 2003 compared to 2002. More importantly, no medium-term rating was revised downward across a category in 2003. The stability (re-affirmations and upgrades) of all ICRA long- and medium-term rating categories improved significantly in 2003. This betters the one-year average since the ICRA's inception in 1991.

There was a distinct shift in the pattern of rating revisions by the ICRA in 2003, when for the first time in several years the number of upgrades almost equaled that of downgrades. While this marked a continuity with the 2002 trend of decline in downgrades and a slight increase in upgrades, the overall decline in the number of rating revisions was more pronounced in 2003. ICRA ratings exhibited a higher degree of stability in 2003, reflecting the continuing phase of economic recovery and the consequent improvement in corporate performance across several industries. During 2003, there were 14 downgrades and 11 upgrades of ICRA long- and medium-term ratings. The number of rating downgrades at 14 in 2003 was less than half of what was witnessed in 2002, when there were 31 downgrades. The number of upgrades, which was eight in 2002, increased to 11 in 2003.

Even information provided by Fitch Ratings India Ltd shows that during the period January-October 2004, there were as many as 13 upgrades and only four downgrades. Not surprisingly, the corporate sector is on a high. The past three quarters have seen profits bubbling, and the quarter ending September is no different. Sales for 1,266 companies are up 13.6% - new markets, better pricing and global competitiveness have helped. Costs are up 14.1% - but neither have wages gone down nor have people been laid off. Operating profits are up 10.7% - but operating margins are marginally down. Interest costs are down by a fifth and it is this 19.6% fall in interest costs that has given the bottom line the 33.4% boost, resulting in soaring stock prices.

On the whole, however, it is the small- and medium-sized companies that have recorded much stronger performance. Overall profitability of mid-sized companies has touched record levels after registering strong growth for the past 10 years. Now these companies are becoming more profitable than the blue chips. Their profits have more than trebled from Rs8.86 billion (US$200 million) to Rs33.29 billion over the decade.

The past three years have seen unprecedented growth in profits. A study of over 100 mid-caps (undertaken by Sundaram Mutual Fund) in NSE's (National Stock Exchange) CNX Mid-Cap index shows that their operating profits have grown nearly twice as fast as Sensex (the Bombay Stock Exchange's sensitive index) stocks in this period. Mid-caps have rallied smartly over the past couple of months, yet their prices have only hit the historic highs that were reached in 1991. In comparison, the current profit levels are twice as big. The study, after removing the tech stocks, as they have seen extraordinary growth in profits, further showed that while 116 CNX mid-cap companies have recorded a compound annual growth of 11% in profits over the past three years, Sensex stocks have posted a growth of only about 6%.

Like the past three quarters, financial efficiency remains the engine of corporate growth. But financial efficiencies can't go on for ever, beyond a couple of quarters it has to go hand-in-hand with operational efficiencies for sustained profits. There's evidence that it is happening already, with corporate India focusing on foreign markets for business and on Indian manpower to service them. This competitiveness is also reflected in India's export numbers, which have been growing at a considerable pace, even with the Indian rupee strengthening. During the first seven months (April-October) of the current financial year, the country's exports have crossed the $40 billion mark, a growth of 23.73%. This is not only above the 7.05% growth recorded during the same period in the previous year but also above the targeted rate of 16%. If this growth rate is maintained for the full year, it would be the best ever in a decade. India could then be well on course of the newly revised export target of $75 billion for the current financial year.

Even imports during the period rose by 31.97%, to $54.732 billion against $41.472 billion in the corresponding period of the previous year. Of this, non-oil imports rose by over 20%, which signals positive growth trends for the economy. The coming quarters, however, are expected to pose a sterner test for the corporates as they will have to contend with the punishing effects of rising costs.

Corporate India, which is virtually running at close to full capacity (see the table below), has lined up impressive investment numbers as business confidence stays high. Industrial capacity utilization levels have moved up to 81.6% during 2003-04, prompting additional capacity addition, especially in the manufacturing segment. The sectors with rising capacity utilization levels are non-metallic mineral products, basic metals and alloy industries, transport equipment and parts, and mining.

Capacity utilization in select manufacturing segments (%)

Industry	FY04	FY05
Food products	76.00	71.20
Beverages and tobacco	81.50	72.30
Cotton textiles	92.90	93.00
Paper and paper products	89.80	89.00
Chemicals and chemical products	83.90	84.10
Non-metallic mineral products	90.80	85.50
Basic metal and alloy industries	86.60	86.00
Metal products and parts	83.70	81.00
Transport equipment and parts	78.20	71.70

Source: Ministry of Statistics and Program Implementation

According to estimates by Projects Today, outstanding investments have increased by 7.9% over the 12-month period ended September '04 to reach Rs20,748.94 billion. The revival has been led by the manufacturing sector, in which outstanding investments grew by 12% to reach Rs3,267.37 billion during the above period. This is on the back of a negative growth of 2.7% in the 12-month period ended September '03.

An 8.2% growth rate in the manufacturing sector during April-September '04 and around 24% export growth during April-October '04 have been the key drivers of manufacturing activity. Around Rs1,548.32 billion of fresh planned investments have been made during the first half of FY05, which is 14% higher than the corresponding period in FY04. Of this, a little over 50% is in the services sector, 34% in the manufacturing sector, followed by 10% and 4% in the electricity and mining sectors.

The stock market realizes that a silent revolution is on and that there is every likelihood that corporate performance will continue to be robust, driven by four key themes: outsourcing, revival in capital investments, rising consumerism and infrastructure focus. Understandably, the market has been on a roll for some time now. Even retail investors, who had been shunning the market, are getting drawn in. More importantly, foreign investors are now coming in droves. In 2003, the number of new FII (foreign institutional investor) registrations was 83. This year, it has already touched 100. The mix is getting richer too: it's not just US FIIs, even European FIIs are eyeing India. Net FII inflow into India in 2004 has reached record levels of $6.64 billion, with as much as $1 billion coming in November itself.

A stream of good public issues, a strong economy compared to other emerging markets, attractive valuations of well-managed companies and the resilience of the domestic economy from global economic and financial cycles are contributing to such massive inflows. A study conducted by a leading business daily in India found that FIIs now account for as much as 28% of combined turnover in the Bombay and National stock exchanges. Clearly, India has become an attractive destination, even for discernible foreign investors.

Kunal Kumar Kundu is a senior economist with a leading bilateral Chamber of Commerce in India. He has a Masters in Economics with specialization in econometrics from the University of Calcutta.

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