Mumbai: Indian companies that depend on sizeable revenue from overseas markets such as the US and Europe may have to brace for heavy weather.
Demand for Indian products and services, both in global and local markets, is likely to suffer, Roopa Kudva, managing director and chief executive of ratings agency Crisil Ltd, said in a statement on Monday.
Also See | Increased Vulnerabilty (PDF)
“Export growth will slow down and domestic private consumption, which has been strong so far, could moderate as consumers become more cautious,” she said.
The dependence on revenues from abroad for some large Indian companies stems from both exports and through large overseas acquisitions.
For instance, Tata Motors Ltd, India’s largest auto maker by revenue, earns around 74% of its revenue from JaguarLand Rover, the UK-based car maker it acquired in June 2008 for $2.3 billion from Ford Motor Co.
Reliance Industries Ltd gets 64% of its revenue from global markets, to which it mostly exports petrochemicals and refined petroleum products.
Companies that will be more vulnerable include those with higher exposure to developed economies, significant un-hedged foreign exchange exposure, higher funding requirements and dependence on refinancing, Kudva said.
In a tell-tale sign of weakening, the new export orders component of India’s manufacturing Purchasing Managers’ Index for July fell 7.5%, the first contraction since May 2009, according to a 3 August report by Nomura Financial Advisory and Securities (India) Pvt. Ltd.
It was too early to predict the outcome on the Indian information technology (IT) sector due to the situation playing out in the US and Europe, according to executives of two local IT firms.
“It is too early to make an assessment on the actual implication of the S&P downgrade of the US,” said T.K. Kurien, chief executive officer, IT business and executive director, Wipro Ltd. “We need to see if the downgrade, along with the prevailing macroeconomic condition, has any further impact on the real economy, which is primarily driven by consumer and business confidence.”
Both Kurien and S. Gopalakrishnan, chief executive officer and managing director of Infosys Ltd, said the slowdown of 2008 left the Indian IT sector better prepared to face any subsequent downturns.
“We were able to react very quickly in the past when the recession happened,” Gopalakrishnan said. “These responses are still fresh in our memory and, I believe that the industry may be able to withstand another global downturn.” Some other companies such as Larsen and Toubro Ltd (L&T) that are dependent on markets other than US and Europe may be relatively unscathed.
“Due to the recent political upheaval in that region (Middle East), the local governments are looking at investing more for growth,” said K. Venkataramanan, president, operations, L&T. “Besides, these economies are oil-dependent and won’t be impacted much.”
Orders from international markets were growing at 20%, and orders from Gulf countries comprised 6% of L&T’s order book, Venkataramanan said.
Graphic by Paras Jain/ Mint
Surabhi Agarwal in New Delhi and John Satish Kumar in Mumbai contributed to this story.