XI

Corporate Sector Developments

The performance of the corporate sector during the first half of 2008-09 depicted a
modest picture, as corporate earnings growth has begun to slowdown due to growing interest
burden and considerable rise in expenditures owing to sharp increases in input costs.
Interestingly, while sales have grown at a higher rate, partly reflecting higher prices, the net
profit growth has decelerated significantly during the first half of the current financial year as
compared with that in the first half of 2007-08.

The share of consumption of raw materials as well as that of staff cost in sales has been
higher as compared with the previous first half reflecting input and wage cost pressures. The
mark-to-market losses by a number of companies on their foreign exchange transactions/loans on
fears of rupee appreciation also have contributed to the sluggish profit growth.

The half yearly performance varied across sectors, sales growth in several segments
witnessed a slowdown in the first half of the current fiscal. Companies of cement, automobiles,
auto components and textile industry saw a significant slowdown, while the sectors, which have
performed well in terms of sales, are sugar, telecom, entertainment, engineering and paints.

Business Expectations Survey

According to the Table 11.1: Business Expectation Index (in%)

Reserve Bank’s Industrial Growth over
Agency Period Index A year Previous
Outlook Survey of Ago Round
manufacturing companies in the July-December Business
NCAER -8.8 -15.4
2008 Expectation Index
private sector, the business FICCI
July-December Business
-20.3 -5.1
2008 Confidence Index
expectations index (BEI) based October-December Business
RBI -4.4 -2.6
2008 Expectation Index
on assessment for July– Dun & July-September Business
-28.1 1.8
Bradstreet 2008 Optimism Index
September 2008 and that based
Source: Macroeconomic and Monetary Developments,
on expectations for October- October 24, 2008, Page 12, RBI.

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December 2008 have declined by 2.4% and 2.6%, respectively, over the corresponding previous
quarters.

As per the latest business confidence survey conducted by Federation of Indian Chambers
of Commerce and Industry (FICCI), the overall business confidence index (BCI) during April-
June 2008 has dipped by 5.1% over the previous quarter and 20.3% over the corresponding
quarter of the previous year owing to rising raw material costs, increase in interest rates and
stricter credit availability. The composite business optimism index for October–December 2008
compiled by Dun and Bradstreet (D&B) has increased by 1.8% as compared with the previous
quarter. However, it has declined by 28% as compared with the same quarter of the previous
year.

The decline in expectation index for October–December 2008 has emanated from lower
net responses for major parameters of the survey such as the overall business situation,
availability of finance, production, order books, capacity utilisation, employment, exports and
profit margins, over the previous quarter. Burgeoning interest costs on account of rising interest
rates, considerable increase in expenditure owing to sharp rise in input costs and mark-to-market
losses by a number of companies on their foreign exchange transactions/loans have added to
negative sentiments of the respondents significantly.

The Centre for Monitoring Indian Economy (CMIE) has revised their estimate for overall
industrial growth downwards to 8.3% from 9.1% for the current fiscal year 2008-09. According
to CMIE, sectors such as electricity, crude oil and petroleum products are likely to show
acceleration in growth in the second half of the current fiscal year. The downfall in aggregate
sales will be largely on account of a significant slowdown in sales expansion of sectors like
chemicals, information technology, commercial vehicles, auto ancillaries, two-and-three-
wheelers, aluminum and aluminum products.

FICCI’s Confidence Survey

Rising interests rates and stricter credit availability are the two major concerns for India’s
corporate sector and would affect its performance, according to the latest business confidence
survey (Q1 of 2008-09) conducted by the apex chamber FICCI. The survey reveals that the bulk

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of small and medium enterprises (SME) sector is worst affected and that its interest cost has gone
up by 3.5% to 5.5% over the last one year. In contrast, the interest cost of large companies has
increased by 1.5% to 2.5% for the same period.

Table 11.2: Growing Concerns

Nearly 75% of the participating
• Bulk of SME sector is worst affected and that its interest
cost has gone up by 3.5% to 5.5% over the last one year. companies in the survey have agreed
• The interest cost of large companies has gone up by
1.5% to 2.5% over the last one year. that banks have tightened their credit
• The rise in interest rates is seen as having a direct impact
on the investment activity of the companies. disbursal norms over time and thereby
Source: The Financial Express, October 6, 2008.
have restricted the availability of credit
to industry. Further, around 97% of the participants have agreed that it is the SME sector that is
facing the pressure the most on account of the hardening of interest rates.

FICCI’s survey has drawn responses from 348 companies in the heavy and light industry
and the services sectors with a wide geographical and sectoral spread. The survey reveals that the
interest rate for companies has increased in the range of 1.5 – 5.5% as the prime lending rate
(PLR) of banks has moved up from 10 – 10.5% a year ago to 13 – 13.5%. In the light of these
findings, FICCI is of the view that the central bank must consider lowering of the interest rates as
this is adversely affecting the industrial and the overall growth momentum in the economy.

Government to Study Impact on India’s Corporate Sector

The Union Government has constituted a committee to consider issues raised by the
corporate sector on global financial crisis and its impact on India. Apprehending that the impact
of the financial crisis in the US will have adverse effect on the India’s corporate sector sooner
than expected, the government has called for a high-level meeting to discuss way to minimise the
damage to key sectors of the economy. According to initial assessments the financial turmoil will
definitely have an adverse impact on the Indian IT industry, while exports could be affected due
to the slowdown in the US and European economies.

The Department of Industrial Policy and Promotion (DIPP) is preparing a note on the
impact of the financial sector crisis. The impact on the manufacturing sector would be
highlighted by the DIPP and details would be submitted to the cabinet secretary. Recently, the
Prime Minister (PM) had met corporate veterans and called upon them to join in with the

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government to convert the current global crisis into an opportunity for India. At the meeting with
industry leaders, the PM said that steps were taken in the recent weeks to lessen the impact of
global financial crisis on India and that further measures would follow to protect the country's
economic growth.

IPO Pricing to be Regulated

Amid allegations of over-pricing of initial public offerings (IPOs), the government is

planning to set up a statutory body to make it mandatory for companies to get their shares priced
by authorized valuers before raising money from the capital market. Currently, the practice of
valuation is not regulated and the ministry plans to regulate the system so that investors can take
informed decisions.

The institution of valuers, being set up by the ministry of corporate affairs, will be a
statutory body on the lines of the Institute of Chartered Accountants of India (ICAI) and the
entities engaged in valuation work will be required to register with the proposed body. At
present, such valuations are done by merchant bankers, chartered accountants, company
secretaries, cost and work accountants or any other professional possessing such qualification.
There were allegations that various IPOs, like that of Reliance Power, have been overpriced due
to which investors got swayed and suffered huge losses as the IPO was traded at price lower than
the offer price at its close on the opening day. After the issue of over pricing, the ministry had
commissioned a study to ICAI for analysing the methods of pricing. These valuers will also help
in fair valuation of shares or properties in case of mergers and amalgamation or allotment of
shares for consideration other than cash.

Certified Emissions Reductions (CERs)

Certified emissions reductions (CERs) are carbon offsets of international emission

trading schemes implemented to mitigate global warming. At present the CER prices in the
international market have declined to €19 from €22 over a month ago. However, Indian
companies are likely to unlock the value of their green certificates to release funds in the
prevailing liquidity crunch.

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 Recently, Mysore Cements has sold over one lakh CERs issued to the company by the
clean development mechanism (CDM) executive board of the United Nations Framework
Convention on Climate Change (UNFCCC). If CERs prices are taken at €20 (around Rs 1,300),
Mysore Cements is estimated to have received around Rs 13 crore for the sale of over one lakh
CERs. JSW Steel has issued 7.4 lakh CERs by the CDM executive board for generating
electricity through combustion of waste gases from a blast furnace and corex units at its
Torangallu unit in Karnataka. JSW Steel is planning to sale its CERs.

Limited Liability Partnership Bill

The Limited Liability Partnership (LLP) Bill, which proposes to provide an alternative
model for doing business in India, is likely to get a consent in the forthcoming session of
Parliament. The Bill has already been cleared by the Cabinet and incorporates suggestions of the
Parliamentary Standing Committee. A limited liability entry is a hybrid of existing partnership
firms and full-fledged companies. It is a separate legal entity, liable to the full extent of its assets
with the liability of the partners being limited to their agreed contribution in LLP. Interestingly,
no partner is liable on account of the independent or unauthorised actions of other partners. The
official expects that a large number of existing companies (public as well as private) will convert
themselves into LLP entities owing to the practical/operational benefits, including those related
to taxation that it provides.

Investments

Toyota Kirloskar Motor (TKM) Pvt Ltd, the Indian subsidiary of Japanese auto giant
Toyota Motor Corporation, has decided to increase its investment at its upcoming second car
manufacturing plant near Bangalore to Rs 3,200 crore. TKM is building its second plant at its
factory complex in Bidadi village near Bangalore where the company has its existing
manufacturing facility that currently produces Innova and Corolla. Besides, an additional
investment of around Rs 1,500 crore would be pumped in for both general purpose and
specalised equipment necessary for manufacturing compact cars in the new plant.

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 US-based electronics auto components major Delphi Corporation has announced the start
of construction of a new electronics manufacturing facility in Chennai. The company will be
investing close to Rs 250 crore in the new plant, which is planned to be built in three phases and
is expected to be operational by end of December.

BSA Motors launches e-Scooters

BSA Motors, a strategic business unit of Tube Investments of India (TII), part of the Rs
9,500 crore Murugappa group and the market leader in bicycles, has forayed into the two-
wheeler segment. The company is launching its e-scooters (electric scooters) in Chennai. The
company is targeting a sale of 10,000 units by March 31, 2009 and plans to sell a total of 60,000
units in fiscal year 2009-10. TII is planning to manufacture 150 e-scooters a day at its
manufacturing plant near Chennai; this will be scaled up to 300 units a day.

Highlights

The US $ 5 billion US Fund Intellectual Venture (IV) is setting up base in India and has
entered into an agreement to buy patents from the Indian Institute of Science, Bangalore and has
plans to tie up with IIT Madras and other such institutes. IV claims to be the eighth largest patent
owners in the world and has generated US $ 1 billion revenues by marketing the patents. Across
Asia, the company has operations in Singapore, Seoul, Tokyo and Beijing.

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