There is no surprise that India and other developing countries came out of the economic downturn better than the developed companies. However, given the market conditions at that time growth forecasts seemed bleak for majority of companies including the ones from developing countries.
But as it turns out, Indian companies have not only managed to brave the tough conditions but have rather grown handsomely at that.
According to an Ernst & Young survey,
Indian companies registered annual average growth rate of 27% as against the 5% for companies in developed countries in the past 5 years
The survey took into account the period from 2006-2010 which is fair estimate to gauge the overall business strength of Indian companies. The period from 2006-2008 was marked by good market conditions and the global economy was positive. 2008 was when the tides turned and the global economy went into doldrums.
To have registered a 27% growth for the said period is phenomenal because the years post 2008 were not at all conducive for a lot of companies especially the capital intensive firms.
Other developing countries are not far behind as companies in Brazil seem to have grown at an average of 22%, closely followed by Russia and China at 17% each.
Another positive trend in the way Indian and other developing companies have grown in the past 5 years is where the growth has come from. First obvious guess is Exports! But that’s not the case.
Majority of companies in developing countries have benefitted from the exceptional growth in domestic markets. The domestic market have really opened up especially in India and the purchasing power of consumers has been increasing consistently.
With a significantly larger population and relatively better financial conditions, Indian companies have targeted the largely untapped domestic market and unlocked great value out of it.
Revenue Growth Aside, Operating Margins Have Increased At A Higher Rate As Well
“Higher growth by companies in developing countries driven by exceptional growth in domestic markets”. My first reaction was- revenue growth would have happened but the margins would have shrunk. Domestic markets are traditionally not as lucrative as the export markets in the US or Europe and it would really difficult to derive a price premium in domestic markets. Well, operating margins of companies in developing countries tell a different story.
Companies in developing economies posted operating margins averaging 24 as against the 18 percent by companies in developed countries
To a certain extent, companies in developing countries enjoy lower labor costs as against their western counterparts and that could have helped these companies reduce operating costs and raise profit margins.
However, there is a slight shift in the positioning of companies in developing countries. There is a possibility that companies in the developing countries with high operating margins are slowly but surely changing their value proposition from being ‘low cost’ alternatives to one of their kind quality product / service providers.
With a value proposition driven by quality and unique offerings, commanding a price premium could be a lot easier thereby helping companies boost their operating margins.
In hindsight comparisons in terms of revenue and profits, companies in the west still fare better where in despite only a 5% revenue increase, they managed to maintain operating margins of 18%.
It would be interesting to note the companies that were sampled especially from India. IT/ITES companies from India could have been considered given that they are mainstays of Indian economy but if included, they would have brought down the average operating margin as IT companies face tremendous margin pressures
The study also highlights that the overall representation of companies from developing countries in the world top 1000 companies by market capitalization has gone as high as 31% as against the 10% in 2000. Indian company IOC recently made it to Fortune Top 100 list which also features a lot of companies from China.
Even as investors seem to have turned a lit skeptical of emerging economies, the companies in these markets are one up their western competitors be it growth or profit margins. It will be interesting if these companies are able to sustain the growth momentum in the next 5 years.
What are your thoughts on the phenomenal growth of Indian companies as against the companies in developed markets? Is a 27% growth sustainable in the near future or will the growth plateau in the coming years