A Reckoner on economic recession & ways to traverse through for Small and medium enterprises

1. 1January 2019B018852-004Commercial In Confidence - Greaves Cotton© Ricardo plc 2018
A Reckoner on economic
recession & ways to traverse
through
Prepared by: Prashant S Nair

2. 2January 2019B018852-004Commercial In Confidence - Greaves Cotton© Ricardo plc 2018
A recession is marked by 2 consecutive quarters of economic decline as
reflected in real GDP; economy still grows at a reduced rate in slowdown
• A recession is a period of massive contraction &
decline in economic activities of a nation
– Largely caused by - substantial drop in
consumer spending & demand
• Technically, an economy is in recession when:
– GDP growth is - ve for 2 consecutive quarters
– In conjunction with GDP, following macro-
economic parameters weakens & falls:
• Income, employment, manufacturing & retail
sales
– Driven by multiple industrial sectors
experiencing significant drop in trade &
business output
• Slowdown on other hand means that economy is
still growing albeit at a diminishing rate: usually
precedes a recession
Rural unemployment rises, urban
stabilizes in the month of Oct 2019
India – Economic Indicators
GDP
Unemployment
GDP grew @ 5% in Q1 FY 20 marking slowest growth since
Q4 of FY 13; China’s economy grew 6.2% in June quarter
Source: CMIE, MOSPI, Economic times, secondary research
Rural
Urban

3. 3January 2019B018852-004Commercial In Confidence - Greaves Cotton© Ricardo plc 2018
1. 2.
Recession is principally caused by consumers & businesses losing
confidence due to aggregate demand & supply side shocks
High interest rates -
limiting liquidity
Credit crunch
3. 4.
Manufacturing order
slowdown
Failing housing prices /
sales
5. 6.
Rising oil prices Fall in wages &
consumer confidence
Economy can slip into recession for multiple reasons mainly
caused by fall in aggregate demand / supply side shocks
• In a recession like situation,
customers would prefer to hang
on to their money instead of
spending
• When customers buy less;
companies are then forced to
curtail production
• Companies cutback production -
eventually workers are laid off
• This creates a vicious circle in
the economy
Consumers start spending less - exacerbates
the situation creating a vicious circle
More jobs are lost – people
consume less and business
suffers
Source: Secondary research

4. 4January 2019B018852-004Commercial In Confidence - Greaves Cotton© Ricardo plc 2018
Small / medium businesses often more vulnerable to recession - inadequate
resources, lack of preparedness; large companies also not impervious
Sales &
profits
decline
New hiring
curtailed /
lay offs etc
Cost cutting
measures
introduced
Stock prices
fall / dividends
plummet
Impaired debt
servicing
capability
Companies
engage in
price wars
1 2 3 4 5 6
• Dwindling in cash flows: SMEs (small & medium enterprises) typically operate on limited cash
reserves; delay in receipts of payments from debtors puts the entire operating cycle in jeopardy
• Reduced availability of credit: SME struggle to secure finances due to limited cash reserves &
non-availability of capital assets as collateral
• Loss of demand: particularly severe for companies reliant on few customers
Small businesses struggle more in comparison to larger ones to navigate through trying economic times
Source: Secondary research, Aspur analysis
Following are some of the key visible impacts on Companies
on Companies during recession

5. 5January 2019B018852-004Commercial In Confidence - Greaves Cotton© Ricardo plc 2018
A mix of strategic, financial and operational interventions are an imperative
to traverse through economic downturn & to recession proof business
Source: Secondary research
Strategic
• Building strategic contingency planning into your culture – well prepared
• Explore alternative markets to absorb additional capacity – exports etc
• Protect your core assets
• Augment customer base - refrain from cutting marketing budgets
• Stress test your business / strategy plans - look at multiple scenarios
• Diversify your business to better insulate against economic turmoil
Financial
• Conserve cash & aim at better working capital management
• Keeping your balance sheet in good health; focus on your credit ratings
• Restructure loans if needed - consolidate debt, balance transfer etc
• Go slow on CAPEX with long payback
Operational
• Meticulously monitor your purchasing costs, cycle time etc & fix inefficiencies
• Proactive operational cost cutting
• Focus on improving employee productivity
• Better inventory management practices - JIT
1.
2.
3.

6. 6January 2019B018852-004Commercial In Confidence - Greaves Cotton© Ricardo plc 2018
“Resilient companies” are able to better weather recession than other
industry peers; they move early & focus on improving operating costs
21551
18926
20737
18735
Q3 18 Q4 18 Q1 19 Q2 19
7831
7243 7225
7565
Q3 18 Q4 18 Q1 19 Q2 19
2391
2333
2459
2335
Q3 18 Q4 18 Q1 19 Q2 19
Sales (Crs) Sales (Crs) Sales (Crs)
15.9%
10.2% 10.9% 10.9%
Q3 18 Q4 18 Q1 19 Q2 19
17.1%
16.0% 16.1% 15.8%
Q3 18 Q4 18 Q1 19 Q2 19
30.8% 29.6% 28.2%
26.1%
Q3 18 Q4 18 Q1 19 Q2 19
EBITDA Margin (%) EBITDA Margin (%) EBITDA Margin (%)
10.2% 7.9% 8.7% 7.7%
Q3 18 Q4 18 Q1 19 Q2 19
14.7% 15.2% 18.1% 14.9%
Q3 18 Q4 18 Q1 19 Q2 19
20.1%
21.5%
19.5%
21.3%
Q3 18 Q4 18 Q1 19 Q2 19
PAT Margin (%) PAT Margin (%) PAT Margin (%)
-12% +9% -9% -7% +0% +4% -2.4% +5.4% -5%
Source: Moneycontrol, Aspur analysis

7. 7January 2019B018852-004Commercial In Confidence - Greaves Cotton© Ricardo plc 2018
Hallmarks of Companies that are better equipped to manage recession –
key takeaways
Source: Moneycontrol, Aspur analysis
1. • These Companies are able to gauge situation & act before the crisis sets in
2. • They aim at long term competitiveness / vision & not just short term solvency
3. • Growth still remains a priority item on their agenda & not only cost cutting
4. • These Companies are invested in a balanced yet diversified business portfolio
5. • These Companies are in the pink of financial health