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April 26, 2009

Corporate India and the downturn

Sumant Sinha, COO of Suzlon Energy and formerly a top executive at the Aditya Birla Group, writes in the Economic Times how Corporate India should deal with the "unprecedented times" we are passing through currently.
(The large business groups) realised the good times were leaving them behind given their relatively risk averse nature, belatedly tried playing catch up, but only ended up coming to the party late. Hence, most of their large acquisitions such as Corus, JLR, or Novelis were very late in the cycle. These acquisitions suffered from the worst of all worlds — they were closed at peak valuations but their financing ran into the post-Lehman environment. Hence, these companies are saddled with huge financing issues in terrible financial markets and a very weak operating environment.

...At the same time, stresses in the system will generally increase before diminishing. To my mind, the worst is yet to come, and we will have one or two more downdrafts before we go into a more sustained recovery. Of course, I could be wildly wrong and we may be in for a much longer bear market than anybody can anticipate, or conversely, the recovery may already be well under way. But this is exactly the point. The range of probable outcomes from here on could be vastly different, each of which appear quite plausible. From a strategic standpoint, therefore, it is really hard to plan for the future. The best plan in today’s context is one where the company comes through unscathed even under the most pessimistic scenario.

...Depending on the company’s situation, this could mean divestitures of some key assets – even at these depressed values — to save the broader business. Alternatively if the company has the cash, a bold move could be the acquisition of strategic assets at attractive prices. However, in this environment it will take a brave manager to make these calls – which in the long term may have a bigger positive impact than risk taking in the boom period.
Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at arun@ventureintelligence.in