October was an inflection point. Till a few months ago, India’s economy was projected to show healthy growth (7.75-8%) during 2008-09. Corporate investment and funding plans were on track. Firms were implementing plans for aggressive growth within India and overseas. The constraints were largely on the capacity/supply side, not on resources or demand. The financial tremors in the US were expected to have little impact within India.
By end-November, the picture changed dramatically. After the financial shocks in October, it is clear that the world is facing an unparalleled crisis. Estimates for India’s GDP growth have been repeatedly downgraded—from 6.5% to 7% for 2008-09 and from 5.5% to 6.5% for 2009-10. Demand is slowing. Funds have become scarce. There is substantial downside risk in 2009-10. An upturn in growth is expected only in 2010-11. Firms in India face two major discontinuities: industry/market dynamics and financial market conditions.
Illustration: Jayachandran / Mint
Industry/market dynamics: Even as demand (domestic and export) slows, the supply pipeline (domestic and imports) continues on its earlier trajectory leading to oversupply in many areas. With new entrants also becoming active, competitive intensity is rapidly increasing. The resultant pressure on prices is already having an adverse impact on margins and profits. Not all sectors are equally affected. Some, such as power generation, are immune from these pressures. In contrast, real estate and aviation are bearing the full brunt.
Financial market conditions: Deleveraging in the Western markets has created a shortage of funds in India. Indian firms are increasingly looking to domestic financial markets to refinance existing forex borrowings and for future funding needs. The result is a scarcity of funds along with rising interest rates and a weakening rupee.
Sectors and firms that have built up leverage in recent years, especially external commercial borrowings and foreign currency convertible bonds, are acutely confronted with this problem. These conditions of credit squeeze and high cost of capital are likely to persist till global credit markets stabilize. Hence, a firm’s financial position (debt-equity ratio) indicates how well it can weather this storm. Debt-free or cash-rich firms are more favourably placed.
In these uncertain times, what purpose does business planning serve? Is it relevant at all?
Most firms in India have initiated immediate actions such as cost reduction, cash management and review of investments in response to the changing circumstances. However, beyond these urgent steps, there is a need to assess funds availability, prioritize initiatives and programmes and allocate resources for the period ahead in the context of a changing market outlook. This, along with specifying responsibility and targets for executives, is the vital role that a business plan can play, depending on the firm’s priorities and imperatives.
The business priorities of a firm will increasingly be driven by how it is placed relative to two factors—market conditions and financial position.
Firms facing a market downturn and having high leverage (beyond norm) face a survival challenge, in terms of liquidity and solvency. Most airlines and real estate firms fall into this category. They need to slash costs, restructure assets, raise cash, manage liquidity and seek new sources of equity on a war footing. As a last resort, they may have to seek support from the government.
In contrast, firms seeing little or no slowdown and having low debt levels can continue to grow aggressively—positioning themselves for the future. This applies to most consumer goods and pharma companies.
Firms that are impacted by the slowdown but have low leverage (e.g., IT services) are in a good position to manage through the downturn. They need to cut back on investments, costs and commitments, conserve resources, explore acquisitions selectively and be ready for the upturn ahead.
Last are firms that are not impacted by market conditions, but have high leverage. Many telecom service providers and infrastructure companies fall into this category. The priority here is to monitor cash flow, raise equity, roll over loans and improve revenues and operational efficiency.
Clearly, each firm/sector has different imperatives. The planning process needs to cater to the imperatives of each firm. The business plan that emerges should identify likely scenarios, prioritize initiatives/actions to optimize cash flow and include an implementation plan with responsibilities and timelines. The resulting financial projections should be tested for sensitivity to different assumptions and contingency plans spelt out.
Many firms are wondering whether and how to prepare their business plans as the next fiscal year approaches. The solution lies in customizing the planning process to address the challenges that a firm faces. Rather than ask whether business planning is relevant now, firms need to determine how to make this process work best for them. The resulting plan can then form an indispensable enabler in tiding over the turbulent period that lies ahead.
Raju Bhinge is chief executive of the Tata Strategic Management Group. Your comments are welcome at firstname.lastname@example.org