India Inc looks strong after Covid, but growth options limited as demand stays weak: Nuvama

MUMBAI: Indian companies look financially stronger after the Covid period, but they are struggling to find new growth opportunities because demand in the economy remains weak, according to a report by Nuvama.

The report said that India Inc’s improvement in internal return on invested capital (I-CRoIC) after Covid happened mainly due to restructuring and cost control, and not because of strong demand growth.

This improvement phase is now largely over, with the five-year I-CRoIC settling around the high teens. However, demand growth has remained below 10 per cent year-on-year and has been slowing down further. It stated, “India Inc as of FY25: All dressed up, but nowhere to go India Inc’s post-covid I-CRoIC improved owing to restructuring rather than demand”.

The report said the weak demand is mainly due to soft exports and slow wage growth. This situation could hurt long-term growth, as weak demand today can reduce the economy’s growth potential in the future.

The report pointed out that the 10-year compounded annual growth rate (CAGR) of demand across sectors is only around 10 per cent. In fact, in seven out of the last ten years, growth has stayed below 10 per cent. This is very different from the 2000s, when demand was strong and grew at around 20 per cent CAGR for many years.

It also highlighted that the slow demand cycle of the last decade has made reinvestment risky for companies. After Covid, a short demand jump pushed sectors like IT, consumer durables, quick service restaurants (QSR), and chemicals to invest heavily in new capacity. But since the demand rise did not last long, profitability in these sectors fell sharply.

Because of these wrong investment calls and high stock market valuations, many stocks have given flat returns over the last four years. This again contrasts with the 2000s, when strong demand easily absorbed rising supply and allowed companies to protect their profit margins.

The report added that improved technology and easier access to capital are reducing the strength of traditional advantages like brand power and distribution networks. This means companies trying to keep high profit margins may face slower growth or more competition, similar to what has been seen in the FMCG and paint sectors. At high valuations, this also leads to weak medium-term stock returns.

The report warned that reinvestment risks are rising in sectors such as power, industrials, hospitals, automobiles, and cables and wires. These sectors have performed well in the last few years but are now facing rising supply, weakening demand, and peak profit margins, making future growth more uncertain. (ANI)