Ficci Bcs July 2010

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FICCIs Business Confidence Survey

Q1 2010-11

July 2010

Federation House, 1, Tansen Marg, New Delhi - 110001


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~ 2 ~ FICCI Research Division


Q1 2010-11

Survey Highlights

While corporate Indias top-line is growing at a reasonable pace, there is tremendous

pressure that is building on its bottom-line. Although companies are seeing that demand

situation in the economy is holding at strong levels, their profit margins are getting squeezed

putting them under stress to meet their own performance targets.

There are three factors which are taking a toll on companies profitability.

One, is the incessant increase in price of industrial inputs and raw materials. Two, is the return of rising wage cost pressures. Three, is the fuel price revision that has led to an across the board increase in

transportation costs for both raw materials and finished goods.

Additionally, companies are facing some pressure on account of the borrowing costs. While

the move over from the PLR regime to the Base Rate regime is being seen to lead to greater

competition amongst banks for customers and force them to increase efficiency, companies do

not foresee any benefit accruing to them in terms of lowering of borrowing costs resulting

from this change. Nearly 72 percent of the firms that participated in FICCIs latest business

confidence survey have subscribed to this view on borrowing rates from banks. Another 24

percent, majority of whom are large corporates, feel that there is a good chance that their costs

will rise with the base rate coming into effect from July 1, 2010.

While high borrowing cost is presently being seen as an impediment to business performance

by nearly 40 percent of the surveyed firms, going ahead this figure is expected to rise. And

this is because of the tight monetary policy stance that has been adopted by RBI. With RBI

already having increased key policy rates earlier this month, there is a strong feeling amongst

firms that another rate hike at the forthcoming monetary policy review on July 27, 2010, will

further jack up their cost of credit. Nearly 87 percent of the firms, which participated in the

FICCI survey, hold this view.

The only consolation that firms seem to have at this point is that if RBI were to hike policy

rates on July 27, 2010, then banks will not increasing lending rates immediately. Nearly 73

percent of companies feel that an increase in lending rates would happen only in the next three

months if RBI were to further tighten monetary policy.


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Given the growing concerns about profitability and pressure of rise in costs on one hand and

the possibility of further increase in lending rates in the months ahead on the other,

companies have sounded a note of caution about performance at the firm and industry level.

The macro situation is also getting vitiated on account of the stubbornly high inflation rates

and the perpetual question over the state of global economy.

These developments have dented the confidence level of corporate India with all the three

confidence indices computed by FICCI seeing a dip in their value.

Current Conditions Index has fallen by almost five notches from 76.3 in last round to71.1 this time.

Expectation Index took a value of 72.2, while in the previous survey it was 74.1.

With both the Current Conditions Index and Expectations Index registering a decline, theOverall Business Confidence Index fell from its value of 74.8 in the previous survey to

71.9 in the present round.

Growing competition from imports is also coming to the fore as a concern area with almost 40

percent of the firms alluding to this factor as a negative development for their business.

Responses to various enterprise level parameters for the next six months are as follows.

Sales 77 percent expect higher to much higher sales Selling price 23 percent foresee an increase in prices Profits 39 percent expect higher to much higher profits Exports 44 percent expect higher to much higher exports Investments 46 percent expect higher to much higher investments Employment 35 percent expect higher to much higher employment


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Q1 2010-11

Survey profile

FICCIs Business Confidence Survey for the first quarter of fiscal 2010-11 drew responses from

311 companies with a wide geographical and sectoral spread. Companies participating in this

survey had a turnover ranging from Rs. 1 crore to Rs. 20,000 crore. Respondents to FICCIs

Business Confidence Survey were from sectors such as textiles, steel, chemicals and fertilizers,

oil and gas, auto and auto components, food processing, electrical equipment and machinery,

rubber and rubber products, cement, FMCG, pharmaceuticals, paper, metal and metal products

and financial services. The survey was conducted during the month of July 2010.

Sector Percentage of respondents

Heavy Industry 67

Light Industry 25

Services 8


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Q1 2010-11

Detailed survey findings

Economy The results of FICCIs Business Confidence Survey for the first quarter of fiscal 2010-

11 indicate a moderation in the perception of respondents about the overall economic

situation. Although there has been an evident return of buoyancy in economic activity over the

last few quarters, growing concerns about inflation that continues to be stubbornly high and a

generalized increase in raw material prices that could decelerate the growth momentum are

weakening sentiments of the survey participants.

In the current survey, 78 percent of the respondents said that the overall economic conditions

vis--vis last six months are moderately to substantially better. Though still high, this figure is

about 10 percentage points lower than the proportion of companies which reported likewise inthe last round. In the survey for the fourth quarter of fiscal 2009-10 around 87 percent of the

participants had reported that overall economic situation had improved over the previous six

months.

Further, while 16 percent of the respondents have said that there is no change in the overall

economic situation vis--vis the last six months, another 7 percent reported that economic

condition has weakened over the last six months.

With regard to expectations about economic conditions over the next six months, 72 percent of

the participants said that they foresee a moderate to substantial improvement. In the last

survey the corresponding figure was 82 percent. Also, while in the last survey none of the

participants had reported that the economic situation would deteriorate in the near term, this

number marginally rose to 4 percent in the current round. The remaining 24 percent of the

respondents feel there would be no change in the overall economic conditions in the next two

quarters.

Industry Results pertaining industry level performance also point towards considerable

moderation in opinion of the respondents. While IIP numbers have been encouraging for some

time now, the most recent data point indicates that there may be some moderation takingplace in industrial growth. IIP growth came down from 16.5 percent in April 2010 to 11.5

percent in May 2010. There are also concerns now emerging about how broad based the

industrial recovery process is.

In the present survey nearly 71 percent of the participants said that their current industry

performance vis--vis last six months is moderately to substantially better. However, this

figure was 16 percentage points lower than the proportion of companies which reported


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likewise in the last survey. Further, the percentage of respondents citing no change in the

industry performance went up from 9 percent in the previous round to 20 percent this time.

The remaining 9 percent of the participating companies indicated weakening of the industry

performance over the last six months.

Similarly, the proportion of respondents expecting an improvement in the industry

performance over next six months has come down. In the current survey, 68 percent of the

participants said that they foresee a moderately to substantially better performance over the

next two quarters. In the last survey the corresponding figure was 82 percent. About 23 percent

of the companies said that they see no change in the performance of the industry in near term,

while 9 percent expect deterioration.

Industry performance Segment wise

Proportion of respondents in the moderately to substantially better bracket

Looking at the sector wise performance, the results show that among the three sectors - heavy,

light and services, the respondents from the heavy and the services sector were most positive

about their current industry performance. However, there was a conspicuous fall in the

proportion of respondents (particularly from the heavy and light industry segments) citing an

improvement relative to last survey.

Around three quarters of the respondents belonging to heavy industry segment said that their

current industry performance is moderately to substantially better vis--vis last six months. Inthe previous survey, a whopping 92 percent of the companies belonging to the heavy industry

segment had reported likewise. An equal proportion that is about three quarters of the

respondents belonging to the services sector indicated an improvement in the current

performance of the industry compared to last two quarters. However, the participants

belonging to the light industry segment were least optimistic, with only 58 percent of the


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companies reporting a better performance vis--vis last six months. The corresponding figure in

the last survey was 77 percent.

With regard to performance over the next two quarters, participants belonging to the services

sector were most confident about their industry performance. Around 75 percent of the

participants from the services sector said that they foresee a moderate to substantially better

performance in the coming six months. In terms of expectations about near term

performances, the services sector was followed by the heavy and light industry segments

respectively.

Firm At the firm level, 73 percent of the participating companies indicated that their current

performance has improved vis--vis last six months. This was 11 percentage points lower than

the proportion of participants who reported likewise in the previous survey. About 10 percent

of the respondents said that performance at the firm level has worsened vis--vis last two

quarters, which was marginally higher than the corresponding figure of 3 percent in the lastsurvey.

Further, 72 percent of the participating companies were hopeful of an improved performance

in near term. In the last survey, 79 percent of the participants had said likewise. The proportion

of respondents foreseeing no change in the performance levels over the next six months

increased to 24 percent this time from about 18 percent in the previous survey. Only about 4

percent of the participants said that firm level performance would weaken over the next two

quarters.

These results indicate that some consolidation in performance can be expected as we go ahead.There is an element of caution that is being reflected in the responses received from survey

participants. While the global economy is still vulnerable and this can have a bearing on

performance of industry at home, there are also concerns that are purely domestic. Persistent

and high inflationary situation, rising prices of industrial inputs, possibility of further tightening

of monetary policy by RBI are all factors that are either already constraining or could pose as

impediments to the growth momentum going ahead.

Further, the analysis of the operational parameters at the firm level shows that while the

outlook with regard to sales, investment and employment has become a little better, the

outlook for profits and selling price has become a little subdued when compared to results of

FICCIs previous Business Confidence Survey.


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Prospects for the next six months

Sales

Selling Price

The expectations of respondents about sales

prospects over the coming six months have seen

an improvement. 77 percent of the participating

companies reported that they anticipate sales to

be higher to much higher in the near future. The

corresponding figure in the last survey was 68

percent. Further, about 19 percent said that they

see no change in the sales level, while the

remaining 4 percent expected lower sales

volume. Among the three segments, the

respondents from the services sector were most

optimistic regarding their sales projections,

followed by light and heavy industry segments.

A majority 65 percent of the participating

companies in the current survey said that they

expect the selling price to remain same over the

next two quarters. Further, about 23 percent of

the respondents said that they foresee an

increase in the selling price in near future. The

corresponding figure in the last survey was 37

percent. The remaining 12 percent of the

participants said that they intend to lower the

prices in near future.

Profits

With regard to profits, 39 percent of the

participating companies cited an increase in

near term. However this was lower than 45

percent of the companies which reportedlikewise in the previous survey. Further,

about 49 percent of the participants expect

profit levels to remain same, while 12

percent said that they foresee a decline.


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Investment

Exports

Employment

In the present survey, 46 percent of the

participants said that they foresee an increase in

investments over the next six months. In the last

quarter survey, 41 percent of the participants

had said the same. Further, around 48 percent ofthe companies participating in the survey

indicated that they expect no change in the

investment levels in near future. The remaining 6

percent of the companies said that they foresee

lower investments over next six months.

With regard to employment outlook, a majority

64 percent of the participants still said that they

expect no change in the hiring situation.

Nevertheless, the proportion of respondents

seeing an increase in workforce over the nexttwo quarters did increase from 29 percent in the

last survey to 35 percent this time. Only 1

percent of the companies felt that the

employment prospects are not bright.

In the current survey, 44 percent of the

respondents said that they foresee higher

exports over the next two quarters. However, an

almost equal proportion (45 percent) of

participants said that they see no change in the

exports situation in near term. Though growth

numbers indicate that exports once again are

back on track, the full momentum is yet to build

up. It seems there is still uncertainty on the

external sector front with global economy still

not fully stabilized.


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Forecast for the next six months

(All figures are in % and refer to proportion of respondents)

Decline Increase

0% -5%

Increase

5% -10%

Increase

10%-20%

Increase

20%-30%

Increase

> 30%Sales 4 23 29 29 11 4

Profits 11 42 22 14 7 4

Exports 10 42 20 17 8 3

Confidence Indices

Confidence Indices

As per the survey results, the proportion of respondents citing an improvement in the current

conditions vis--vis last six months at all the three levels- economy, industry and firm, has

witnessed a decline. As a consequence, the Current Conditions Indexfell by almost five

notches from 76.3 in last round to 71.1 this time.

Similarly, moderation was seen in the expectations of the participants about the near term

performance at all the levels. The Expectation Indextook a value of 72.2, while in the previous

survey it was 74.1.

With both the Current Conditions Index and Expectations Index registering a decline, the

Overall Business Confidence Index fell from its value of 74.8 in the previous survey to 71.9 in

the present round.


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Constraining factors

(Figures pertain to proportion of respondents citing the factor as a problem area)

Problem Area FICCI BCS

Q12009-10

FICCI BCS

Q22009-10

FICCI BCS

Q32009-10

FICCI BCS

Q42009-10

FICCI BCS

Q12010-11

Weak demand 66 62 37 22 23

Threat of imports 34 34 29 26 38

Constrained availability of credit 27 20 15 19 8

High cost of credit 41 37 33 43 39

Infrastructure 36 35 38 39 35

Rising cost of raw materials 55 52 77 85 77

Rising manpower costs 45 42 66 72 65

It is clearly evident from the survey results that the demand conditions in the economy have

witnessed a significant improvement over the past one year. Weak demand was reported to be

a constraining factor by 66 percent of the respondents in the first quarter of the fiscal 2009-10.

In the current survey about 23 percent of the participating companies reported likewise.

The improving demand situation in the economy is getting reflected in the order book position

of the firms. In the present survey nearly 53 percent of the firms said that their present order

book position was better as compared to the situation six months back. In the previous survey

this figure was just a tad higher at 56 percent.

On expectations about the order book position six months hence, 64 percent of the companies

said that they foresee an improvement in near future. This was about 6 percentage points

higher than the proportion of companies saying the same in the last survey. Further, around 34

percent of the participants said that they see no change in the book position over the coming

six months.

Current order book position vis--vis last six months Expectations about order book position six months hen


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While the demand situation in the economy has improved over time, increasingly we are also

seeing that a smaller set of firms is complaining about availability of credit. However, this is as

far the comfort level of the companies goes as there are some very important factors that seem

to be acting as impediments to business performance of members of corporate India.

Rising cost of raw materials and rising manpower costs continues to plague a whopping 77

percent and 65 percent of the companies. We are also seeing that the proportion of companies

complaining about threat from imports has gone up from 26 percent in the previous survey to

38 percent in the present round.

Another important factor that is playing on the minds of respondents is the cost of credit with

nearly 40 percent of the participating firms saying that they are concerned about the interest

rates. In the context of interest rates and the withdrawal of easy money policy stance by RBI,

FICCI asked the participating companies on whether they thought their cost of credit would go

up if RBI continues to increase repo and reverse repo rate. And the responses show that amajority 87 percent of the companies fear that cost of credit would go up if RBI continues with

monetary policy tightening.

Members of corporate India believe that if the central bank increases the key policy rates in the

forthcoming monetary policy review meeting on July 27, 2010, then the interest costs would go

up over the next three months. This view was shared by 73 percent of the companies that

participated in the FICCI survey.

Following hike of policy rates by RBI, when will interest rates go up?

Proportion of respondents

Immediately Over the next 3 months Over the next 6 months

11 73 16


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Another development related to the borrowing cost which companies have to pay is the move

over to the base rate regime by the banking sector from July 1, 2010. FICCI asked the

participating companies on how they viewed this changeover to the new regime. The initial

reaction of the companies is that while it will certainly lead to greater competition amongst

banks for customers and force them to increase their efficiency, it is a little too early tocomment on how banks would work under the new dispensation.

However, there is general feeling that move over to the base rate regime will not alter the

borrowing costs. This view was shared by 72 percent of the firms. Another 24 percent of the

firms and majority of these were large corporates said that they expect borrowing costs to go

up under the base rate regime. Only a miniscule 4 percent of the companies said that they

expect their interest costs to go down under the base rate regime.

Will the base rate regime impact your borrowing cost?

Yes, our borrowing cost will

rise

Yes, our borrowing cost will

go down

No, there will be not much

change in borrowing cost

24 4 72


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Q1 2010-11

Survey at a glance

FICCI

BCS Q1

2009-10

FICCI

BCS Q2

2009-10

FICCI

BCS Q3

2009-10

FICCI

BCS Q4

2009-10

FICCI

BCS Q1

2010-11

1a Current overall economic conditions vis--vis the last six

months

Moderately to Substantially better 69 79 83 87 78

Same / No change 21 19 13 11 16

Moderately to Substantially worse 10 2 4 1 7

1b Expectations for overall economic conditions for the next

six months


Same / No change 17 17 17 18 24


2a Current industry performance vis--vis the last six

months


Same / No change 26 27 17 9 20


2b Expectations for industry performance in the next six

months


Same / No change 31 20 23 15 23


3a Current firm level performance vis--vis the last six

months


Same / No change 23 24 21 14 17


3b Expectations regarding firm level performance in the

next six months


Same / No change 23 19 21 18 24


4 Confidence Indices

Current Conditions Index 65.4 71.0 71.0 76.3 71.1

Expectations Index 68.1 73.1 70.0 74.1 72.2

Overall Business Confidence Index 67.2 72.4 70.0 74.8 71.9

5 Problem areas

Weak Demand

Yes 66 62 37 22 23

No 34 38 63 78 77

Threat of imports

Yes 34 34 29 26 38

No 66 66 71 74 62

Constrained availability of credit


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Yes 27 20 15 19 8

No 73 80 85 81 92

High cost of credit

Yes 41 37 33 43 39

No 59 63 67 57 61

Rising raw material prices

Yes 55 52 77 85 77No 45 48 23 15 23

6 Present capacity utilization

Less than 25% 2 1 3 1 0

Between 25% and 50% 19 16 8 5 13

Between 50% and 75% 30 30 28 35 29

More than 75% 49 53 60 58 57

7 Prospects for the next six months

Investments

Much higher 5 5 2 5 8

Higher 25 35 35 36 38

Same / No change 53 48 53 51 48

Lower 17 12 11 8 6Sales


Higher 48 63 66 62 70

Same / No change 41 35 22 27 19

Lower 9 0 5 5 4

Selling price


Higher 16 20 16 33 20

Same / No change 62 63 62 58 65

Lower 22 15 20 5 12

Profit

Much higher 1 1 1 1 6Higher 36 30 36 44 33

Same / No change 46 56 46 36 49

Lower 17 13 17 19 12

Exports


Higher 34 35 38 36 42

Same / No change 39 43 46 44 45

Lower 24 22 15 17 12

Employment


Higher 21 15 28 29 34

Same / No change 66 75 66 67 64Lower 13 8 4 4 1


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Annexure 1

The Composite Business Confidence Index is based on questions pertaining to the overall economic

conditions, the sector or industry level situation and the organization or company level situation. The

index is a three-stage weighted average relating to:

The current situation vis--vis the situation in the last six months and

The expected situation in the next six months

Zones of Business Confidence

Significantly Optimistic

Zone of Indifference

Significantly Pessimistic

____________________________________________________

0 15 30 45 55 70 85 100

Extremely Pessimistic

Moderately Pessimistic

Moderately Optimistic

Extremely Optimistic


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Documents

Ficci Bcs July 2010