The fickle, or shifting, business dynamics that is seeing companies raise the revenue bar in good times, only to see it slip at other times, is the cause of much roiling in the market. It’s plainly evident that these are not the best of times. All-round increases in revenue encompassing almost all sectors, the kind that lifts all boats, have been sorely elusive.
High revenue growth is the backbone of a strong economy. At present, its patchy overall, high in a few sectors, faintly visible in others and downright deadbeat — even negative — in many segments.
In this scenario, growth doesn’t come so easy. It comes at a cost—and with a struggle. And the cost is not a price you pay, but one that the economy bears. In the last few years, particularly for the period of this study, between 2012 and 2015 of the KPMG & BW Fastest Growing Companies, the overall expansion is taking place at a much slower pace.
Look at it another way. The size of the pie has not much increased. And so, when some companies in the pie do rack up outsized growth, the contours of the pie begin to change — a bigger slice goes to those that can channel fast-paced growth.
For some time now, this has been happening in the economy, and companies that are growing faster are snatching a sale or two from competitors. Says Manish Chokani, Director, Enam Holdings: “In a slack economy, one theme that emerges is of companies taking away share from others, either through improved productivity, technology or a marketing edge or cost cutting, etc., whatever works. In an environment of high growth, everybody benefits. In an environment of slowing growth, however, the winners are basically those companies that are able to gain at the expense of others.”
The growth rate of the barometer of the economy, the earnings of the BSE Sensex, have registered a measly 6.52 per cent CAGR over 2012-15. In the current year, FY16, the earnings needle is not expected to budge at all, and might even come negative when commodity companies and the banking segment are traversing a torrid time in international and domestic markets.
These are times when the divergence among players becomes apparent, particularly as some companies shift ways of doing business into higher gear. This is more often visible with some of the big players, who operate in billion-dollar industries such as software.
This crucial shift in levers of growth for Tata Consultancy Services happened when it started moving to big ticket projects. At the same time, though, some large companies did not capitalise on the evolving business scenario. Chokani reckons that companies such as TCS are gaining ground at the expense of big IT international companies such as IBM.
Some more ways of cranking up growth were on display through the inorganic route during our period of study. Mining company Vedanta is a merged entity of the erstwhile Sesa Goa and Sterlite, resulting in its revenue skyrocketing to over Rs 32,372 crore in FY15, from Rs 6,460 crore in FY 12.
Another company that has leapfrogged into the big league of global pharmaceutical companies through the inorganic route is Sun Pharma, which too merged with erstwhile Ranbaxy, creating a Rs 7,731-crore behemoth in India. This merger makes Sun Pharma the largest pharmaceutical company in India, and the fifth-largest global generic company, seeing it race ahead and emerge among the list of fastest-growing companies in the large-sized space.
The fastest-growing space is not all about mergers but also about tapping opportunities visible in some of the fast-growing sectors. Clearly, one of the fast-growing sectors has been the domestic consumer space. Chokani avers that the corporate space is seeing the emergence of four segments, which are distinguishing the men from the boys, and the faster-growing companies from the also-rans. Says Chokani: “You have the Indian consumer space, then you have the Indian financial space; then there is the global commodities space, and global value-added companies such as IT and pharma.”
The growth levers of all these segments have been vastly different and vary among categories. For instance, in the domestic sector, consumption is buoyed up by increasing household spending, visible in some sectors such as automobiles, FMCG and the smaller housing companies. Some of the companies in this space which have worked out a good business model, such as Future Consumer, Kwality and Ajmera Realty, among others, have clocked exceptional growth.
In the Indian financial space, which has not been included in this study, the pie is skewed toward private banks and non-banking finance companies. These are taking away market share from the PSU banks. Some of the private sector players are clocking above-average credit growth, in the range of 20 per cent while overall credit growth has been about 10-11 per cent.
There are global commodity players where the speed of revenue growth depends on price increases of commodities, which has been rising during this study. For instance, oil prices were hovering around $110 from Jan 2011 till June 2014. And this has been exceptionally well reflected in the fortunes of Cairn India.
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Fast-forward a year and the picture has changed somewhat dramatically as global commodity prices, both metals and non-metals, have fallen by two-thirds from their peaks. Crude oil is now hovering around $40, dipping from June 2014 and causing revenue and profits of companies like Cairn plummeting this financial year. Says Chokani: “The whole gloom lately has been around commodities and policy-heavy industries.”
Changing business dynamics are nothing new in the commodity space, but the speed at which prices change often disrupts the business models of many companies. Anil Singhvi of Institutional Investor Advisory Services points out, “Anything six months ago loses its relevance quite quickly. Business models are constantly evolving and it’s a question of having a sustainable business model. Doing business the old way, as you did yesterday, may not hold water tomorrow.”
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Hence, companies can’t take for granted any more their place on the growth spectrum. Apart from pricing dynamics, another sign of how crucial business models are to the rate of growth is the changing nature of their consumers and whether they have persistent purchasing power. A finished-goods company is better placed on the spectrum than a raw-material producer when prices are falling, and vice versa.
Changing business dynamics and policies will bring in new businesses on to the list of fast-growing companies. Singhvi considers that the new Real Estate Bill would lead to a new pace of growth in this sector. “Real estate will see a churn, and emerge as the fastest-growing industry.”
And, needless to say, for more companies to emerge as fast-growing, the pace of growth hinges on growth in the broader economy. “For India to emerge as a fast-growing economy, sectors such as agriculture, infrastructure, automobiles and pharmaceuticals are key, since they would result in huge employment.”
Also, domestic companies can’t crank up their pace of growth unless the rural sector begins to see a revival — and much of it hinges on a good monsoon. Says Singhvi: “We do not have a feel-good factor because of the below-normal rainfall last monsoon. If that changes because of the good monsoon this year, we will have reasonably good growth.”
And if this happens, many more companies will be able to raise their growth rates.
BW Reporters
Having addressed business, stock markets and personal finance for the last 18 years, Clifford Alvares has ridden the roller-coaster markets - up close and personal -successfully, traversing the downs and relishing the rises. The greater part of his journalistic ventures has gone into shaping articles about how to shape portfolios
