Tale of 2 companies

The out-of-form TCS and HUL reveal the urgency of better deliveries by the central bank and the government

By Mohan Sule
At first glance, they do not even resemble chalk and cheese. One is an Indian company that is becoming transnational. The other is the Indian outfit of a multinational company. One has a dominant presence in an emerging sector, offering back-office tech solutions, while the other is an old warhorse persuading buyers to upgrade their lifestyles by consuming its products. TCS is known as a leading outsourcing supplier; HUL has outsourced most of its manufacturing to local enterprises. The fortunes of one swing with the movement of currency, while volatility in crude oil prices boost or cut the input costs of the other. Yet there are similarities in their operations. Both apparently run businesses that are called defensive by market folks. Banks need their ATMs to function even during a bear phase just as ordinary folks have to brush their teeth and bath irrespective of an economic downturn. Both are constituents of the broad market indices of the NSE and the BSE. They are run by professional managers. In quest of growth, both are rapidly expanding their footprints across geographies: one overseas, another at home. Of late, the two companies are increasingly changing their complexions to become cyclical plays. A slowdown in its export markets affects the prospects of one, while poor monsoon and high inflation result in resistance for the products of the other. With the economies across the globe getting tightly integrated, both encounter a bull and bust phase at the same time. Also, the foreign exchange market and the oil market are increasingly getting linked. Fall in oil prices bolsters the economies of the developed countries, the main market of TCS, as well as the domestic economy, the domain of HUL. At the same time, the local currency appreciates on good growth prospects, hurting the revenue of exporters. A strong currency encourages imports and intensifies competition in the domestic market.

The December 2014 quarter amplified the woes of TCS and HUL as both got caught in the crosscurrents of the global and local economies. Loss of consumer confidence was the major reason for the slowdown of the US and the Indian economies for the better part of 2014. However, the causes of the manifestation were different. US buyers had become risk averse after the collapse of home prices, while Indian users saw their disposable income shrink after spending on costly food items. TCS’s revenue was near flat over the September 2014 quarter and HUL’s volume growth slipped to 3% over the year. The software major had last recorded such a performance five years ago and the FMCG giant two quarters ago. HUL had to focus on volume rather than on pricing to drive even this tepid growth, while the highest attrition rate in six fiscals kept TCS afloat. The software services provider blamed the holiday season for the lackluster show. The consumer staples maker, which could increase its margin by a percentage point solely due to fall in price of an important input, attributed the late onset of winter and intense competition for the personal-care category nearly halving sales. Both the companies find themselves at a crossroads. Their markets have become price conscious after the turmoil in their economies.


The poor form of the two leaders in their categories, one a play on the export market and another on the domestic market, reflects the state of the economy. The Reserve Bank of India will have to accelerate its rate-cut cycle. This will encourage consumer spending and discourage short-term foreign investors from parking their funds in the country for higher yields. The upward pressure on the Indian currency will ease and give breathing space to the central bank instead of being overwhelmed by the dollar deluge, necessitating a mopping up operation to maintain the rupee’s competitiveness, which could trigger inflation. The delicate nature of recovery will reign in the finance minister from tampering with personal or capital gains taxes in the coming budget. With the rural market losing its growth momentum after deficient rainfall, there will have to be determined efforts to bring investment into these areas. The rural employment guarantee scheme has been modified to funnel money only into productive assets. The haste in passing the land acquisition ordinance now appears appropriate. If the PSU divestment program succeeds and a good amount of money collected from the telecom spectrum auction, there will scope for reduction in personal taxes. Falling oil prices have provided room to clean up the country’s balance sheet. The recent price correction could be an opportunity for investors to take a fresh look at these companies, which have the scale to claw back their way to leadership roles.