Mumbai: For some of India’s largest corporations, it is a homecoming of sorts. As the growth and global commodity cycle turns in favour of India, core sector firms are increasing their focus on the domestic markets which promise stronger growth and higher margins.
The managements of large firms, such as Tata Steel Ltd, Larsen and Toubro Ltd, JSW Steel Ltd, Grasim Industries Ltd and UltraTech Cement Ltd, have all indicated that the Indian market will be a bigger priority for them than global markets in the next few years.
At an estimated growth rate of 7.6% for fiscal 2017, India is expected to be the fastest growing large economy in the world. In contrast, markets in West Asia are facing an acute squeeze due to low commodity prices. With Europe and Japan also remaining sluggish, competition in smaller markets from companies based in South Korea, Europe and China has also intensified.
All put together, executives at large Indian firms see the Indian market as their best bet even though there are no signs of a pick-up in the investment cycle domestically.
The starkest example of this may be Tata Steel, which is disentangling itself from Corus Group Plc, which it acquired in 2007. Declining demand for steel and a sharp drop in the price of the alloy as well as competition from cheap Chinese imports have made large parts of the business unsustainable.
Tata Steel UK Ltd has completed the sale of its entire long products business to investment firm Greybull Capital Llp for a nominal amount. The firm is also in the process of selling its other UK steel assets.
On 25 May, while speaking after announcing the company’s annual results, Koushik Chatterjee, group executive director (finance and corporate) at Tata Steel, said the company’s immediate focus is to strengthen operations at its three-million tonne Kalinganagar plant in Odisha.
For Tata Steel, the share of India’s contribution to its total steel deliveries increased to 39% in March 2016 quarter from 34% in the same quarter last year. Consolidated deliveries, or steel that was sold by the company, was at 6.94 million tonnes in the March 2016 quarter, of which 2.72 million tonnes was from India. The share of India’s contribution to the company’s total turnover has increased to 35% in March 2016 quarter from 31% in the same quarter last year. The total turnover was at Rs.29,508 crore in the March 2016 quarter of which Rs.10,522 crore was from India. For the March 2015 quarter, total turnover was at Rs.33,666 crore, of which Rs.10,635 crore was from India.
Indian infrastructure conglomerate Adani Group may also be planning an exit from its ambitious $16 billion mining project in the Galilee Basin of Queensland.
The Australian on 4 June reported that the company’s founder and chairman, Gautam Adani, had told the newspaper that the he was disappointed the “pit to plug’’ project had yet to receive the green light after six years of environmental assessments and court battles.
In his first interview with the Australian media, Adani said he hoped the court challenges to Australia’s largest proposed coal mine would be finalized early next year.
“You can’t continue just holding. I have been really disappointed that things have got too delayed,’’ Adani told The Australian.
“The India focus reflects the relatively better growth prospects of India vis-à-vis other markets. It also reflects a low nominal growth scenario in most developed markets which limits leverage reduction in debt financed acquisitions—in turn impacting the return to shareholders,” said Rakesh Valecha, senior director and head (credit and market research) at India Ratings and Research.
Apart from delayed approvals, a turn in the commodity cycle has made the project less attractive than it appeared at the time it was conceptualized.
“They went overseas when the world economy was doing well,” said Madan Sabnavis,chief economist at CARE Ratings.
“Then the financial crisis erupted, followed by the euro crisis. And the projects which looked profitable earlier, now became less viable or not viable at all. What we are seeing today is that companies are selling off these assets to reduce debt,” Sabnavis said, adding for those who are focused on India as a strategy for the next 2-3 years, it is because India relatively looks better than other economies.
Other firms, like India’s largest engineering and construction firm L&T, a corporate proxy for the broader economy, are also starting to bank on improved prospects in the domestic market. In 2015-16, L&T’s outstanding order book was at Rs.2.50 trillion. Out of this, 28% was from international markets, slightly above 26% a year ago.
This could change in the current fiscal year.
“We see better prospects this year than last year. Implementation on ground is taking longer than we had thought,” A.M. Naik, group executive chairman, L&T, said on 26 May, adding he now has more confidence for the next six months than six months ago.
A senior analyst with an international brokerage said that risks in the domestic market are lower than those overseas. “The Indian market has a competitive advantage in terms of better margin, and risks are contained compared to the international landscape,” said the analyst, requesting anonymity.
Sajjan Jindal-led JSW Group has also indicated that it will shift its mix of business in favour of the domestic markets.
Seshagiri Rao, joint managing director at JSW Steel Ltd and chief financial officer at the JSW Group, in an interview late last year, said the company is changing the geographical mix across its steel business to improve margins. One reason for this is the increased competition from Chinese steel in global markets.
While Chinese imports had surged in the domestic market as well, the imposition of a minimum import duty has helped level the playing field.
At JSW Steel, exports, which accounted for 26% in 2014-15, came down to 11% in 2015-16. Though margins are not strictly comparable with the international markets, owing to various trade actions or dumping duties imposed, JSW Steel can claim upwards of Rs.1,000 per tonne as premium for steel sales in the domestic market.
“India is the only big geography which is seeing demand growth. In addition, export realizations are also lower due to high competition from Chinese producers,” said Goutam Chakraborty, analyst at Emkay Global Financial Services.
Aditya Birla Group company Grasim Industries, that has presence in the viscose fibre, pulp and cement sectors, is also sharpening its India focus.
Domestic contribution in the pulp and fibre business increased from 65% to 68% in the last one year.
Sushil Agarwal, chief financial officer and wholetime director at Grasim Industries, said that the firm’s cement division will also remain focused on India as a market. “(Open to) any acquisition or brownfield opportunity, which helps increases our market leadership. There is enough and more to do in India,” Agarwal said, answering whether the group will look to expand in foreign market and become a global cement maker. Grasim Industries holds 60.25% stake in Ultratech Cement.