Team-BHP > Shifting gears


Reply
 
Thread Tools Search this Thread
Old 20th March 2020, 11:15   #1
BHPian
 
racer_ash's Avatar
 
Join Date: Jun 2012
Location: Hyderabad
Posts: 537
Thanked: 909 Times
Default Why are companies across sectors hanging by a thread?

Most of us would have heard the story of the Ant and the Grasshopper. The Ant works hard throughout Summer and collects enough food so it can tide across Winter without trouble, whereas the grasshopper whiles away its time in Summer only to face extreme hardships during Winter.

The same analogy was taught to many of us during our upbringing. 'Always save for a rainy day'. 'Don't take in more than you can chew' etc. are some of the philosophies that we have all grown up with.

However, looks like the same philosophies are not applicable for the corporates in India and even around the world. Day after day, week after week, we hear of sob stories from almost every sector of the economy. From Telecom companies (What do you think of the AGR dispute between the DoT and Telecom companies?), to global aviation (Global airlines could face bankruptcy, Governments may have to step-in) to banks (SBI & LIC step in to save Yes Bank; withdrawal cap of Rs 50,000 imposed) and even dealerships (FADA wants to sell BS4 cars till 31st May, 2020), almost every key sector is under distress. Add to this, the Corona virus effect (Effects of Coronavirus on the global economy) and the situation is only turning even more grim by the day.

What do you think is the cause of so much trouble across sectors? Why are companies not able to tide over disruptions like this? Aren't the CAs and Auditors not able to predict such downturns or do they go about doing business assuming there will only be sunny days always with no chance of rain.

I request learned members of this estemeed forum to please help a layman like me understand the cause of this. Like I said, we broadly seem to abide to the 'Ant vs Grasshopper' philosophy in our personal lives, but don't seem to do so in a corporate scenario.
racer_ash is online now   (20) Thanks
Old 20th March 2020, 11:27   #2
Senior - BHPian
 
alpha1's Avatar
 
Join Date: Apr 2007
Location: P00NA
Posts: 1,881
Thanked: 1,525 Times
Default re: Why are companies across sectors hanging by a thread?

Quote:
Originally Posted by racer_ash View Post
.........What do you think is the cause of so much trouble across sectors? Why are companies not able to tide over disruptions like this? Aren't the CAs and Auditors not able to predict such downturns or do they go about doing business assuming there will only be sunny days always with no chance of rain.

I request learned members of this esteemed forum to please help a layman like me understand the cause of this. Like I said, we broadly seem to abide to the 'Ant vs Grasshopper' philosophy in our personal lives, but don't seem to do so in a corporate scenario.
The number one reason is Public listing and distributed ownership.
Nothing makes the management as much short sighted as the daily share price performance.
Why should I make a "rainy-day" fund and lock up that much capital?
Why should I not declare higher dividend or declare a news about re-investment of profits into a potentially higher revenue / profit making idea?

CAs and Auditors are not fortune tellers that can predict what's going to happen tomorrow!

Last edited by khan_sultan : 20th March 2020 at 16:25. Reason: trimmed quoted post
alpha1 is offline   (23) Thanks
Old 20th March 2020, 12:44   #3
BHPian
 
padmrajravi's Avatar
 
Join Date: May 2019
Location: Kozhikode
Posts: 374
Thanked: 1,079 Times
Default re: Why are companies across sectors hanging by a thread?

Most companies are run on debt. The debt-equity ratio is very high for most capital intensive businesses like Automotive, Airline etc. So the moment revenues start falling, they will not be able to make interest payments. The only companies who can survive bad days are the ones with less debt with large cash reserves. Such companies do not exist in modern times.
padmrajravi is offline   (12) Thanks
Old 20th March 2020, 12:53   #4
BHPian
 
Join Date: Jun 2012
Location: Traveller
Posts: 135
Thanked: 167 Times
Default re: Why are companies across sectors hanging by a thread?

The reason for present situation is Fed.
Every time from September 2000, Fed liquidity tap is the constant in panic situations. This easy liquidity is never utilized for/by the right person & always ends up in wrong hands/markets creating huge bubbles & crashes. A normal person carries his/her life/business without worries of liquidity. But for business started/based only on this liquidity wave, life becomes difficult without it.
Actually Fed is using such people by force feeding liquidity to them during calamity.

Also blame Excel + PPT, why?
Lies, damn lies & statistics.

Businesses hide the bad part in numbers & end up in huge correction when discovered.

As Shri B Ramalinga Raju wrote 'that carrying on with the deceit was like riding a tiger, not knowing how to get off without being eaten'.
ritz3645 is offline   (11) Thanks
Old 20th March 2020, 13:00   #5
Senior - BHPian
 
Join Date: Jan 2015
Location: Chennai
Posts: 1,193
Thanked: 3,299 Times
Default re: Why are companies across sectors hanging by a thread?

Disruptions (technological, political, environmental....etc.)

The biggest enemy of your product or service is not the nearest competing similar product or service (read about Marketing myopia by Ted Levitt - https://hbr.org/2004/07/marketing-myopia)

Thus, each airline is having their slice of the pie eaten away by Citrix (webex) and Greta Thunberg, not by competing airlines.

For Telecom companies, their slice of the pie had been eaten up by home internet (and WhatsApp and Skype and what not, since voice and video calling is possible and no one needs to make ISD calls)

Why our banks have been failing - now that's another matter altogether, with shady politicians involved.
locusjag is offline   (7) Thanks
Old 20th March 2020, 13:15   #6
Team-BHP Support
 
SmartCat's Avatar
 
Join Date: Jun 2007
Location: Bangalore
Posts: 4,692
Thanked: 23,311 Times
Default re: Why are companies across sectors hanging by a thread?

Fraud and greed in Indian banking/finance sector (both public and private sector) is shocking and unprecedented. There is simply no fear of the law.
SmartCat is online now   (20) Thanks
Old 20th March 2020, 14:04   #7
Team-BHP Support
 
Samurai's Avatar
 
Join Date: Jan 2005
Location: Banglore-Udupi
Posts: 23,999
Thanked: 22,388 Times
Default re: Why are companies across sectors hanging by a thread?

Quote:
Originally Posted by racer_ash View Post
The same analogy was taught to many of us during our upbringing. 'Always save for a rainy day'. 'Don't take in more than you can chew' etc. are some of the philosophies that we have all grown up with.
Businesses can't work on this philosophy. Their working capital generally covers them for few months, provided they have revenues even when cashflow is bad. If sales completely dry up, every company is just 3 month away from bankruptcy.

That is what is happening now. Suddenly lots of businesses are seeing their sales vanish into thin air, with no light at the end of the tunnel.

So they are not going to sit around waiting for cash to totally run out. They will start cutting costs right away.
Samurai is offline   (14) Thanks
Old 20th March 2020, 15:07   #8
BHPian
 
racer_ash's Avatar
 
Join Date: Jun 2012
Location: Hyderabad
Posts: 537
Thanked: 909 Times
Default re: Why are companies across sectors hanging by a thread?

Quote:
Originally Posted by alpha1 View Post
CAs and Auditors are not fortune tellers that can predict what's going to happen tomorrow!
True. However I am sure based on past data and statistical evidence, they may be able to predict a downturn. Purely based on data and not speculation that is.

Quote:
Originally Posted by padmrajravi View Post
Most companies are run on debt. The debt-equity ratio is very high for most capital intensive businesses like Automotive, Airline etc. So the moment revenues start falling, they will not be able to make interest payments. The only companies who can survive bad days are the ones with less debt with large cash reserves. Such companies do not exist in modern times.
So why do companies want to increase debts rather than cash reserves? Does it reflect badly on their balance sheets?

I know companies like Apple and Infosys sit on huge reserves of cash.

Quote:
Originally Posted by ritz3645 View Post
Also blame Excel + PPT, why?
Lies, damn lies & statistics.
Lies, I can understand, but why do you think Statistics is bad?

Quote:
Originally Posted by locusjag View Post
The biggest enemy of your product or service is not the nearest competing similar product or service (read about Marketing myopia by Ted Levitt - https://hbr.org/2004/07/marketing-myopia)
Heard this term during my MBA days (from the Marketing guys that is) and was often discussed as one of the biggest mistakes any marketing professional can make. Not sure why this was forgotten when it comes to real life.

Quote:
Originally Posted by SmartCat View Post
Fraud and greed in Indian banking/finance sector (both public and private sector) is shocking and unprecedented. There is simply no fear of the law.
Tell me about it. The lack of respect for the law is appalling. Not only here but in general public life itself.

Quote:
Originally Posted by Samurai View Post
Businesses can't work on this philosophy. Their working capital generally covers them for few months, provided they have revenues even when cashflow is bad. If sales completely dry up, every company is just 3 month away from bankruptcy.

That is what is happening now. Suddenly lots of businesses are seeing their sales vanish into thin air, with no light at the end of the tunnel.

So they are not going to sit around waiting for cash to totally run out. They will start cutting costs right away.
But unless there is complete lockdown, there will still be SOME sales anyway. However, what amazes me is that with so much talk to volumes in the Indian context, why is it that companies die down within a matter of months rather than a year or two.

Not sure how relevant this is. I have heard that there are new accounting standards in the US (ASC 842) etc. which are aimed to target the very issue of hidden liabilities (from stuff like leasing etc.) within companies. So will this solve atleast some of the issue?

Last edited by racer_ash : 20th March 2020 at 15:24.
racer_ash is online now   (3) Thanks
Old 20th March 2020, 15:10   #9
Distinguished - BHPian
 
Join Date: Oct 2012
Location: Delhi
Posts: 4,947
Thanked: 16,494 Times
Default re: Why are companies across sectors hanging by a thread?

It is all about cash flow. Companies don’t go bankrupt because they are running at a loss. Companies, big and small, go bankrupt because they have a negative cash flow.

That is what is happening across the board, small, large, multinationals.

With a few exceptions the demand for their products and or services has come almost overnight to a crashing hold. So no income/Sales, but still in many case all kinds of cost. Be it employees, buildings, loans etc. So it is down to your financial reserves, but very few reserves are dimensioned for such a crash of demand. And no matter what the size of your reserves is, it is finite and unless the demand for your products and services picks up, you are going down hill very quickly


In such a scenario many companies get themselves into BIG problems very quickly.

Jeroen

Last edited by Jeroen : 20th March 2020 at 15:12.
Jeroen is online now   (12) Thanks
Old 20th March 2020, 16:11   #10
Distinguished - BHPian
 
Thad E Ginathom's Avatar
 
Join Date: Jun 2007
Location: Chennai
Posts: 9,055
Thanked: 12,437 Times
Default re: Why are companies across sectors hanging by a thread?

Quote:
Originally Posted by alpha1 View Post
The number one reason is Public listing and distributed ownership.
Nothing makes the management as much short sighted as the daily share price performance.
Why should I make a "rainy-day" fund and lock up that much capital?
Why should I not declare higher dividend or declare a news about re-investment of profits into a potentially higher revenue / profit making idea?

CAs and Auditors are not fortune tellers that can predict what's going to happen tomorrow!
A big yes, but also a but...

There have publicly-owned companies for a long, long time. It is only in recent years that the financial industries have encouraged this mania for this-quarter results.

But here is another thing. I read yesterday that five American airlines are clammering for massive USA-government handouts. But they have given as much to executives and shareholders in the last few years. No saving for a rainy day there!

US airlines pushing for massive bailout gave $45bn to shareholders in five years

I have huge sympathy for small businesses in times such as this --- but absolutely none for the big MNCs who are unable to cope with a bad week, month, or even year. And loyalty to staff is not going to be on the priority list.
Thad E Ginathom is offline   (9) Thanks
Old 20th March 2020, 16:59   #11
BHPian
 
Join Date: Dec 2005
Location: bang
Posts: 308
Thanked: 508 Times
Default re: Why are companies across sectors hanging by a thread?

On the other hand there are companies like Apple which are rolling in cash. There are companies which have created a niche ,a myth ,a legend for themselves and they pick and chose their customers. Market share wise, apple is a very small player but tell me anyone who does not want a i whatever. Apple has been enormously successful in building a brand even when competitors like samsung are able to offer similar products at almost half the price. Perhaps, the answer is to build a brand with good offerings and emphasis on bottomline performance than to try to cut down competition and captur market share.
srini1785 is online now   (5) Thanks
Old 20th March 2020, 17:51   #12
Newbie
 
Join Date: Aug 2018
Location: Mumbai
Posts: 6
Thanked: 5 Times
Default re: Why are companies across sectors hanging by a thread?

It appears that large tech cos (GAFAM) are the best positioned to ride out such situations with the their dominant global brand, undisputed tech leadership and in fact drive greater demand for certain offerings (for ex. demand for cloud). In essence their clout grows with every year globally.

Wonder if resource based industries (power/ telecom/ renewables) can do well in a country where shifting regulations can land business models and rev/ cost assumptions in jeopardy? Their problems are only partly of their creation. Would be interested to know why there is so much leverage that is built up across industries otherwise?
anand253 is offline  
Old 20th March 2020, 19:27   #13
BHPian
 
Join Date: Feb 2006
Location: bangalore
Posts: 340
Thanked: 211 Times
Default re: Why are companies across sectors hanging by a thread?

Quote:
Originally Posted by srini1785 View Post
On the other hand there are companies like Apple which are rolling in cash. There are companies which have created a niche ,a myth ,a legend for themselves and they pick and chose their customers. Market share wise, apple is a very small player but tell me anyone who does not want a i whatever. Apple has been enormously successful in building a brand even when competitors like samsung are able to offer similar products at almost half the price. Perhaps, the answer is to build a brand with good offerings and emphasis on bottomline performance than to try to cut down competition and captur market share.
Even brands only have a limited role and that too in certain industries. Even the best branded/managed airline will be staring at a void now. Same goes for hotels, cineplexes etc. And the millions of small businesses.

The current event is unprecedented and dont think anyone would have predicted it ( Similar to 911).

The only way is govts. stepping in with funds/tax holidays/some other support.
m8002? is offline  
Old 20th March 2020, 20:39   #14
Distinguished - BHPian
 
Thad E Ginathom's Avatar
 
Join Date: Jun 2007
Location: Chennai
Posts: 9,055
Thanked: 12,437 Times
Default re: Why are companies across sectors hanging by a thread?

Quote:
Originally Posted by srini1785 View Post
On the other hand there are companies like Apple which are rolling in cash. There are companies which have created a niche ,a myth ,a legend for themselves and they pick and chose their customers. Market share wise, apple is a very small player but tell me anyone who does not want a i whatever. ... ... ...
Well, me, actually! I have never wanted any Apple product at all.

Except... I wish I'd bought their stock. Especially as, back in the 90s, I was vehemently disagreeing with colleagues pointing at Apple v Windows PCs and predicting Apple's imminent demise. Of course, I didn't dream of the products that they would go on to make, or how huge that would become, but I felt sure they would survive and thrive.
Thad E Ginathom is offline   (8) Thanks
Old 20th March 2020, 22:51   #15
AZT
BHPian
 
Join Date: Nov 2019
Location: Bombay
Posts: 66
Thanked: 261 Times
Default re: Why are companies across sectors hanging by a thread?

Quote:
Originally Posted by racer_ash View Post
What do you think is the cause of so much trouble across sectors? Why are companies not able to tide over disruptions like this?

I'll share something I read specific to the United States but it should simplify things. In this situation we have a distributed attack on the system. How do you bail out restaurants, airlines, hotels, malls, casinos, cruises and real estate all at once? Distributed default is not easy to contain, if someone runs a small business with $1M in revenue and $100K in profit, it means his monthly expenses are $75,000! This is a big issue. Even if it’s a single month at 0% interest… It would take the person 9 months to recover. Now scale this up and spread it across the united states. That is the current situation today.

In simple terms many companies operate with leverage. This means they have more debt than cash. So imagine you have $1M in debt and $200K in the bank to run your small business. Well.. if the business makes $1M per year, you’re probably okay. If the business has slim margins (restaurants, airlines, casinos, etc all have slim margins), then you’re in trouble if your annual income was low.
AZT is online now   (4) Thanks
Reply

Most Viewed
How I bought myself a Porsche at 25 years old
The 10 worst Indian cars of the last decade
Mustang crashes into truck driver - shows no remorse
Don't be naive, all of this happens before your PDI
Polo GTI falls off a flyover captured on video
Miscreants assault me & my car - justice prevails
Thread Tools Search this Thread
Search this Thread:

Advanced Search

Copyright ©2000 - 2020, Team-BHP.com
Proudly powered by E2E Networks