Managing Growth 2017- Part 2

Kamal, you spoke of small unorganised developers being wiped out. So, is that a risk, because the profit that they make is really the tax that they avoid? Do we necessarily need to go through this painful exercise?
Khetan: We obviously don't want such kind of players because they’re making money only because they’re evading tax…

But they are also providing employment…
Kamal Khetan, chairman, Sunteck Realty: But no industry or corporate would like to operate in such an environment 

Himanshu Jain, MD & VP (Indian subcontinent) Sealed Air: You don’t build a house on a shaky foundation. So, the faster you clean up the mess today, the better it will be tomorrow. We have a courageous government which has taken this step, it may not be the smartest move; but somebody has gone to the extent of doing such an audacious move with the intent of cleaning up the system. What we have always lacked in our country is leadership and we have always moved on with some small tinkering. So, let’s give some credit to the government for showing its intent.

Sebi Joseph, president, Otis India: The issue was with its execution but ultimately the system will get cleansed. It may take a while. I don’t think it will, what I call, be a battle for growth, at least, in the long term. Now, on the point of higher tax collection; we may not see a 25-30% jump, but even if it’s 10%-15%, it’s still a great thing as far as our country is concerned. 

Is the sharp demand contraction over? Are you we seeing signs of a revival?
Joseph: There are initial signs of a recovery as our sector is linked with the real estate sector.

Kamal, are you sensing a recovery in real estate?
Khetan: Within real estate, the commercial market was doing well and it continued to do well during demonetisation. On the residential side, after December, sales have slowly started picking up. I feel, post March, once the financial year gets over and there’s more clarity on a rate cut, demand will start picking up. In fact, demand should be much better than it was before demonetisation.

Jain: Across the sectors wherever we’re working, we’re seeing a demand pick-up. Hospitality sector for the past couple of years was growing at 4%, so we are expecting it to become 6% in 2017, and 8% in 2018. We have clearly seen projects getting started and money is being pumped into that sector. In the QSR space, while international chains are going through a phase of consolidation, local chains and start-ups are springing up quite rapidly. That sector is growing at roughly 20% year-on-year. Next is the beverage industry, which is really going through a tough phase with the carbonated drinks market slowing down. But players are investing in new products; like non-carbonated drinks. Then the bigger sector for us is the cleaning industry what you call as building service contractors, that segment is doing extremely well. 

Shahani: The fact is that for growth to bounce back we need to have a policy initiative. The PM’s aspirational target is to move up in the ease of doing business rankings; currently we’re No 145. Now, when you say single-window clearance, it has to be single and not 49 windows. All that just has to go. For example, in this Budget, we spoke of FDI and FIPB going away. Now, why should FIPB go away in 2018? It’s just a stroke of the pen. FDI hasn’t flown into healthcare and power for the past two years because of the distinction made between brownfield versus greenfield. These are just artificial divisions, just open up. India is a great market, so money will flow in. We’re still stuck in some of these bureaucratic boundaries. 

Joseph: In 2015 and 2016, our market grew by 8-9%. This year also I don’t see any reason for the market to grow less than 7%. There are couple of reasons — one, infrastructure spend is going to be higher and, second, the push towards affordable housing. It’s going to help grow the industry in a big way. The after-effects of demonetisation may extend up to June-July and with GST coming in July, we’ll have a little bit of turbulence. But even then the growth will be around 7%. 

Demand in pharma is not a big problem, so what are your biggest business challenges today?
Ranjit Shahani, VC & MD, Novartis India: Healthcare and pharma industry were growing at double digit even at the peak of demonetisation. I think the real challenge is predictability of policies. The regulator has been very unpredictable. The pharma industry is not saying that abolish price control. All we’re saying is that, have some predictability so we can manage our business and plan strategically ahead. If you take multinational companies, their challenge is that the IPR environment is still not world class. The prime minister is keen that India becomes an IPR-compliant nation; we should have investment in R&D. We joined the WTO in 1995, now we’re in 2017, which is 1/5th of the century right? Now if you look at it that way there should have been a significant movement up the curve. That’s not happened; else we would have seen R&D investments flowing into India. The demand is exists; there is still potential for much higher growth because 2/3rds of the population has no access to medicine. That is why we need investment in health infrastructure because you have the lowest priced medicines available in India, lower than Pakistan or Bangladesh but if you go 100 km outside a big city, then there’s no access to medicines. You have a Pepsi and Coke available in every village but you don’t even get Paracetamol or Aspirin. It’s a challenge that has been recognised but no action has been taken yet. 

From real estate’s perspective, what are the biggest business challenges?
Khetan: The RERA (Real Estate Regulation Authority) due in May 2017 is a welcome move. I feel any sector which was regulated whether its telecom or insurance, the market has grown and so have organised players. RERA will give lot of comfort to buyers and obviously shady and weak developers would get wiped out because of this. So, the opportunity is for players like us while the challenge is for those who want to do business the old way. 

Do you see real estate prices coming off?
Khetan: Unfortunately, except the developer everybody just wants real estate prices to crash. If you look at it, for the past three years, real estate prices haven’t gone up. Even if it’s not gone down, the price has been static for three years. During this period, inflation grew and so did the Ready Reckoner rates of every state government by 10-15% year-on-year. Today, the real estate cost in the city of Mumbai especially is high not because of construction costs but owing to all those fungible FSI costs, the premiums, the stamp duty on the Ready Reckoner rates and so forth. So, if you’re getting a house even after three years it is 10, 12% cheaper. The coming off of home loan rates by 200-250 basis points from its peak itself means a 15-20% cut in a buyer’s EMI. 

Are you investing for growth?
Jain: We have not stopped investing in any year. Our investment is into technology of doing things better and in people because you need more people, because our entire business is about creating a market. Since we need to convince people and tell them what you should do, it takes time to convert. So, the only thing that limits our growth is our internal capability to grow that many professionals who can go out there and create a market. From a customer’s perspective growth can be impacted in a particular year but from a market share perspective the only thing which matters to us is our ability to grow people. Hence, I don’t see any challenge beyond finding the right talent.

Khetan: We’ll continue to invest in growth. We have just announced a new product on the lines of affordable housing before the Budget itself. 

Shahani: Given India’s demographics, healthcare and pharmaceuticals continue to be a growth market. While we’re not putting any capex on the ground, we’re launching new products and are looking at how the market evolves. 

What is your projection on the growth rate?
Shahani: I would like to err on the side of aggression but I think I’ll be realistic and can’t pitch above 7%.
Joseph: I would agree with that. We have to be cautious.
Khetan: Same here. Maybe next year we can think of much better rates but not now. 
Jain: 7.2% is a damn good number in itself! 

This is the second of a two-part series. You can read part one here.