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Forthcoming Corporate Restructuring

November 28, 2008

As the saying on the street goes, Teji Mein Teji, and Indian corporates got caught in the same whirlwind only to realize they have to go in for a restructuring now.

Most Corporates have built its businesses for 8-9% growth. Growth is likely to slow down to 5-6% over the next couple of years, and this will mean that profits will likely decline. If corporate India wants to avoid a significant fall in ROE, then a major restructuring cycle must get underway.

And the difference between lat 90s and now is that the former one was earnings burst was driven by high financial gearing. The coming earnings decline will be caused mainly by operational gearing. Cost structures that were built for high GDP growth will have to shrink.

The sectors that seem to be at the biggest risk of earnings decline purely on the basis of negative operating leverage include Materials, Industrials, and Utilities. These companies can undertake some mico restructuring exercises like – reduce costs – mainly relating to employees, rent, and non-operations; rationalize capacity; change product mix to reflect a possible down trading in customer spending patterns; lower exposure to asset markets, especially real estate and equity; reduce cash balances to pay down debt.

The companies with the maximum operating leverage and high financial leverage include a bunch of Consumer Discretionary, Industrials, and Real Estate companies.

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