Impact of Recession on Automobile Industries in India
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5.0: Findings and Conclusion
The present research is an extensive and detailed study of two Indian industries to evaluate the impact of global economic recession on their financial performance, in which researcher has made the following observations & conclusions-
5.1: Impact of Economic Recession on Indian Automobile Industry
To study Indian Automobiles Industry five listed company in Bombay stock exchange, namely Atul Automobiles Ltd., Eicher Motors Ltd. Hero Honda Motors Ltd., LML Ltd. and Tata Motors Ltd. were chosen as samples and following results were derived. It was found that total income of the Atul Automobiles Ltd. got only marginal change in post-recession period as is observed from Table No.1. But the position of the total expenses of the company was same in post-recession period as compared to pre-recession period. The average expenses turnover ratio (ETR) for pre- recession period was 0.97 whereas the post- recession ETR was also 0.97. Table no.4 reveals explicitly that the operating profit ratio (OPR) of the company has decreased in post-recession period by 0.03 in comparison of pre-recession period, but the gross profit ratio (GPR) of the company did not show any improvement in post-recession period. The net profit ratio as well as the average amount of EPS decreased from Rs. 6.87 in pre-recession period to Rs. 4.28 in post-recession period. Thus the performance of Atul Automobiles was affected due to financial turmoil called recession. In case of Eicher Motors Ltd., the average ETR (expenses turnover ratio) as well as OPR increased in post-recession period which shows not good position of the company. The average earning per share & net profit ratio decreased in post-recession period as revealed from Table No.8. There was a nominal increase in gross profit ratio from 0.06 to 0.07. Table No. 9 reflects that the total income of Hero Honda Motors Ltd. was Rs. 88728.40 million and Rs. 101128.00 million for 2005-06 & 2006-07 respectively which increased up to125694.80 in 2008-09 and161167.60 in the year2009-10. A little decrease in ETR but a significant improvement in average GPR, average NPR and Earning per Share during post-recession period was a very healthy sign of the financial performance of the company, as is evident from Table No. 12.
The cyclical upheavals in domestic as well as foreign automobile markets marred the performance of LML Ltd. badly. In spite of decreased expenses and OPR in post recession period, the average GPR, NPR and earnings per share have dipped making the company a loss making firm as per the figures of Table no. 16. TATA Motor Ltd. is another major company which endured the wrath of increasing costs and plummeting demand in the form of increasing expense ratio, decreasing OPR, NPR and the average earning per share during post-recession period whereas average GPR was almost stable. Table No.21, 22, 23, 24 &25 further reveal that automobile industry as a whole did not perform very well with respect to expenses, & profitability in post recession period, but its average gross profit ratio as well as earnings per share have increased marginally during post-recession period. According to ROI ratio of Dupont model Hero Honda Ltd. was more efficient firm in comparison to remaining sample companies of the industry.
5.1.1: Impact of Economic Recession on Indian Hotel Industry
The study under consideration has also evaluated the impact of global economic recession on five Indian hotels namely Oriental Hotels Ltd., Blue Coast Hotels Ltd, EIH LTD., Indian Hotels Ltd & Asian Hotels Ltd. From Table No. 30 the comparison of financial performance of Oriental Hotels Ltd. in pre-recession period as well as in post-recession can be made. The ETR in post-recession period was more as compared to pre-recession period. The OPR for the pre-recession period was also more as compared to the post-recession period. The NPR and average EPS of the hotel for pre-recession was higher as compared to post-recession period. Thus the global economic recession affected the EPS performance of the Oriental Hotel Ltd. The GPR and the NPR of Blue Coast hotel Ltd. for pre-recession period was greater as compared to the average of post-recession. The average OPR in post-recession period was less as compared to the average OPR of the pre-recession period as depicted by Table No. 34. The average OPR of the EIH Ltd. for post-recession period was 0.26 which was lesser in comparison to OPR during pre-recession period. The average GPR for pre-recession period was 0.26 which is higher as compared to the GPR of post-recession period. We can adjudge from Table no.38 that the EPS of the EIH Ltd. for post-recession period was less as compared to pre-recession period. The poor financial state of Indian Hotels Ltd. during post-recession period has been highlighted by declining GPR and NPR from table No. 42. The Earning per share of the Indian Hotels Ltd. for pre-recession period was Rs. 18.81 whereas it remained only Rs. -0.91 in post-recession period. In pre-recession period the average OPR of the Asian Hotels Ltd. was 0.42 whereas it was 0.30 in post-recession period. The average NPR for pre-recession period was equal to the average NPR for the post-recession period of the hotel. Surprisingly the average EPS of the Asian Hotels Ltd. in post-recession period i.e.44.38 was more than the EPS for the pre-recession period i.e 32.50 as observed in Table no. 46. Table no.47, 48, 49, 50 and 51 reveal that expenses performance and the operating performance of the Indian hotel industry was adversely affected due to global economic recession. The total NPR of the industry was 0.86 for the pre-recession period and 0.46 was the total for post-recession period. The average NPR in the post-recession was 0.09 which was lesser to the pre-recession average 0.17 as explained in table no. 50. The pre and post-recession performance of the hotel industry has been tested through paired t-test at α = 0.05 where calculated t value was 2.74 which was found to be significant at 5% level of risk. The net profit performance of the hotel industry is decreased in post-recession period in comparison. Return on Investment ratio in Dupont model suggests that Oriental Hotels Ltd was more efficient as compared to the industry samples.
5.1.2: T- Test:
The Pre-post measures were further statistically analyzed using t Tests, so that it can be ascertained that the differences between the measures are due to the phenomenon i.e. ‘Economic recession’ and not “by chance”. Statistical tests allow us to make statements with a degree of precision. Level of significance has been taken up to .5 and .1, as the data has been procured from secondary sources.
In case of Expense turnover ratio in automobile industry, the ETR for pre-recession and post-recession period were tested through paired t-test at α = 0.05. The result observed was t =.374, which was not significant at any level of risk. Null hypothesis was not rejected. Hence expenses performance of the Indian automobiles industry was not significantly changed due to global economic recession.
The average ETR for Indian hotel industry was µ = 0.65 which is less as compared to the post-recession ETR µ = 0.75 of the industry. The study under consideration has tested the pre and post-recession ETR performance through paired t-test (two-tailed) where t = - 7.67 observed and highly significant at 1% level of risk. Hence expenses performance of the Indian hotel industry was affected due to global economic recession
In case of OPR the average OPR of the Automobile industry in pre-recession was µ = 0.03 which is less as compared to post-recession period µ = 0.07. The study also tested the OPR for pre and post recession period in order to get empirical output by using paired t-test where t = -1.136 and not statistically significant at any standard level of risk. Hence the OPR performance of the industry is not influenced greatly due to global economic recession
The average OPR for Indian hotel industry was µ = 0.38 which was more as compared to the post-recession OPR µ = 0.18. The study under consideration for operating performance through paired t-test (two-tailed) observed that t = 4.78 which was highly significant at 1% level of risk. Hence operating performance of the Indian hotel industry is adversely affected due to global economic recession.
In case of GPR- the average GPR of the automobile industry in pre-recession was µ = -0.01 and µ = 0.03 in post-recession which was more as compared to the pre-recession value. The t-value for the GPR (pre and post) was t = - 1.141 which was negative and not significant at α = 0.05. Thus Null hypothesis has been accepted.
The average GPR for Indian hotel industry is µ = 0.30 which was more as compared to the post-recession OPR µ = 0.17 of the industry. The pre and post-recession Operating performance of Indian hotel industry has been tested through paired t-test (two-tailed) at α = 0.05 where t = 3.72 was observed and significant at 5% level of risk. Hence gross profit performance of the Indian hotel industry was adversely affected due to global economic recession.
The NPR for pre-recession and post-recession period for automobile industry were tested through paired t-test where the resultant t = -.907 which was not significant at any level of risk while testing at α = 0.05. Hence net profit performance of the automobiles Indian industry was not significantly changed due to global economic recession even though net profits of the industry were reduced in post-recession period (0.06 > 0.04).
The average NPR of hotel industry in the post-recession was 0.09 which was lesser as compared to the pre-recession period. The pre and post-recession period performance of the hotel industry was tested through paired t-test and the result was t = 2.74 significant at 10% level of risk. Null hypothesis has been rejected. The net profit performance of the hotel industry has decreased in post-recession period very apparently.
In case of EPS in automobile industry the average EPS was µ = 27.93 for pre-recession period and µ = 31.00 for post-recession period. The EPS was also tested for empirical results through paired sample t-test at α = 0.05 and the result was t = -.394 which was not significant at any level of risk. Hence the EPS performance of whole industry was not much affected.
In hotel industry the pre and post EPS performance has been tested through paired t- test where t value has been calculated as, t = .989 which was significant at 5 percent level of risk. Null hypothesis has been rejected. Hence the EPS performance of Hotels industry has been adversely affected due to global economic recession.
From the above study, we deduce that when the developed nations of the world were feeling the scorching blaze of the financial break down, Indian industry felt the heat only. When there was recession, India witnessed only a slowdown that is, its intensity was less. The findings of this research also indicate same results, and the similar type of results has been supported by many other contemporary studies.
The global recession had only a dampening effect on the growth of Automobile industry but hotel industry got a major setback. According to analysis made above the expenses in aforesaid industries were not affected much due to recession, whereas sales and profitability of these industries did tumble down but their growth is about to bounce back after this short term phenomenon. Latest information indicates that these are on the path of fast recovery. Various factors attributed to this industrial resilience may be counted as:
The conservative but sensible financial policies of the government- An approach of full convertibility of rupee on the Current account, but a very cautious phased out approach towards Capital account convertibility. The volatile FIIs would have easily wreaked havoc in the country in the face of this international crisis, but this cautious approach & RBI intervention for capital account convertibility helped in maintaining a grip on exchange rate. Along with it expansionary monetary & fiscal policy helped in achieving external as well internal balance in the economy. This corresponds to Mundell Model. Monetary policy focused on augmenting liquidity-both domestic rupee as well as foreign exchange liquidity- to make them available at lower rates. This was supported by fiscal stimulus measures aimed at cushioning the deficiency in demand. (i) the repo rate was reduced by 425 basis points to 4.75 per cent, (ii) the reverse repo rate was reduced by 275 basis points to 3.25 per cent, (iii) the cash reserve ratio (CRR) was reduced by a cumulative 400 basis points to 5.0 per cent, and (iv) cumulative amount of primary liquidity potentially made available to the financial system was over Rs.5.6 trillion or over 10 per cent of GDP. Even in the second phase of policies measures to fight recession the Monetary policy supported recovery process without compromising on price stability and so keeping policy rates unchanged it rolled back the unconventional measures undertaken in response to the crisis. This helped the economy to return back to normal pace of activity & growth.
Large domestic demand emanating from the huge middle class and consumerism insulated these industries from external shocks and dipping demand. Reduction in taxation by the Government, say automobile sector was passed on to the consumers by companies led to increased domestic demand. Even though the exports’ performance dipped during recession, sufficient demand from the domestic markets supported these industries after getting a shudder.
High rate of domestic savings: The Indian psyche of saving money was a big saviour in these testing times when organizations turned towards the domestic banking sector for their investment needs with lesser Foreign Institutional investments in the market. Along with it, RBI’s decreasing Bank rate, cash reserve ratio, Repo rate, Reverse Repo rate helped in credit expansion and stimulation of investment to support industry.
5.2.1:Cheap Resources: The availability of cheaper factors of production, especially labour, also helped these industries to sustain the recessionary shocks.
Skilled and educated labour: It was a major reason behind the quick recovery of the industries under study, especially the automobile industry which had creative and skilled labourers, to bring in competitive advantage.
Improving infrastructure: To fight out recessionary trends, the government introduced various fiscal measures, especially the public expenditures. It made huge investments in infrastructure and programmes like Bharat Nirmaan, NREGA, etc, which are facilitating industry, trade and commerce.
Comparative as well as competitive advantage to our industries helped them in surviving this catastrophe. Comparatively cheaper labour in the automobile industry has brought comparative advantage in the form of decreased costs. Along with it, their skill and efficiency were helpful in getting competitive advantage to brush aside the business losses in these industries.
5.2.2: Promotion of tourism: India is the most popular destination for heritage tourism, adventure tourism, eco tourism, and medical and wellness tourism, which may boost up the hotel and tourism industry, especially in the post-recession period. The government as well as health industry is making enough efforts by attracting more people for heritage and eco tourism and by curtailing travel & treatment prices. Whereas till 2009, there hasn’t been any visible sign of growth in the hotel industry but an influx of 10 million tourists in 2010 in comparison to 4.98 million in 2007 has given a huge scope to hotel industry.
Huge pump priming of Rs 3 lakh crores in the economy with specific measures for various sectors, especially to export industries was another great reason for their resilience.
5.2.3: Entrepreneurship: Recession was a great time to start new ventures and boosting innovation as laid off engineers, scientists, and other skilled persons decided to pursue their own ideas. Entrepreneurship has been promoted giving the industry sustainability.
Due to these reasons, our industry as well as economy could endure this great recessionary fall, while getting little cuts and bruises only.
5.3: Limitations of the study
The present study measured the impact of recession on only two but major industries namely hotel industry and automobiles industry with limited number of units considering the paucity of time & resource constraint.
The research was based on secondary information. Moreover the secondary information taken was not for a long period, as economic recession surfaced in 2007 only.
Authenticity of research findings depends upon the authenticity of secondary data used in the study.
5.4: Further scope of the study:
The study can be replicated to verify more industries and larger samples. Since the industrial recovery has been attributed to the government policies up to an extent, we can make another empirical study to explore the effectiveness of these policies as well as the effectiveness of corporate strategies.
Along with it, various social, economic, psychological and sociological perspectives related to recession can also be taken as further statistical studies he Government, on its part, has been injecting huge amounts into the system through stimulus packages and duty cuts. The 3rd package announced by the Finance Minister in Parliamentmeans pumping another 29,000 crore into the system by way of duty cuts in excise and customs as well as service tax. He also announced that the 4% cut in central excise duties made in December 2008, would continue for the next fiscal as well. In the interim Budget also
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