Indian subsidiaries, relatively minor cogs in the wheels of large multinational companies until 2007, have emerged as crucial profit generators, as earnings in developed western markets tumble amid the worst economic downturn in a generation.
Barring a few exceptions, the locally-listed units of companies such as ABB, Glaxo, Siemens, Cummins, Oracle, Suzuki, Whirlpool, Nestle and Areva have increased their contribution to the global consolidated earnings, as growth remains robust in various sectors of Indian industry.
Significantly, this has happened despite a sharp depreciation of the rupee against major international currencies in the past one year, which tends to depress earnings in dollar terms, as the dollar value of the subsidiary’s contribution is lower after currency conversion. Had this not happened, the contribution of these Indian units would have been much higher.
The Indian unit of engineering group ABB contributed 18% of global profits in the last quarter. ABB India posted a net profit of Rs 193 crore ($50 million) in the October-December quarter of 2008, up 7% from the year-ago period. The parent company, by comparison, posted a nearly 88% drop in net income globally for the fourth quarter at $213 million.
Diesel engine maker Cummins reported a 78% jump in net profit to Rs 133 crore in the fourth quarter of 2008 at its Indian operations. This comes at a time when its parent’s net earnings more than halved to $43 million. As a result, Cummins India’s contribution to global earnings has jumped to almost 63% from about 10% in the Q4 of 2007.
Ditto with business software major Oracle, which acquired Indian banking software company i-flex (now Oracle Financial Services Software) four years ago. It posted a 74% increase in profits (Rs 193 crore) from India for the October-December quarter. For the same period, Oracle’s global earnings fell 0.7% to $1.29 billion.
India’s biggest carmaker, Maruti Suzuki, has helped its Japanese parent despite lower profits. Suzuki’s losses during the last quarter would have been higher by 32% (around 4 billion yen) had it not been for the contribution from Maruti.
Similarly, consumer durables company Whirlpool India reported lower earnings for the October-December quarter, but still contributed a higher percentage of profit, which rose to 3.2% from 1.1%.
Despite a drop in revenues during the fourth quarter, Siemens India’s contribution to its parent’s earnings has risen to around 4% from 0.5%, while in the case of GlaxoSmithKline, which has two separate listed companies in India, the combined profits from its consumer goods and pharma units more than doubled to Rs 240 crore. The UK parent reported a 10% drop in earnings to £1 billion during the quarter.
Some like Colgate reported better earnings growth in India compared to the global firm, but a 25% depreciation in the rupee’s value against the dollar over the past one year brought down its contribution to the consolidated earnings. Swiss cement maker Holcim’s two Indian firms, ACC and Ambuja Cements, together saw profits drop around 25% for 2008. But this drop was much lower compared with Holcim, the profits of which for the year more than halved.
India’s economy, which grew by more than 9% on average in the past three years, is expected to slow to near 6-7%, but this is far better than the deep recession staring at most developed economies. However, HDFC Bank chief economist Abheek Barua chose to play down the impact of Indian subsidiaries.
“Whether India and China can help the global economy to grow with them is yet to be seen. Similarly, it is still unclear whether the Indian arms can lift the global performance of MNCs to stem the global downturn,” he said.
The past two years have seen a sea change in the profile of a majority of Indian arms of multinationals, from being revenue drivers for their parents, they have now metamorphosed into significant profit generators. Nestle India reported a 29% jump in net profit for 2008, while its Swiss parent posted a 17% drop in profit, excluding a one-time gain from a stake sale in a company.
One exception to the trend was Hindustan Unilever. Its Anglo-Dutch parent Unilever reported a sharp 51% jump in profits during the fourth quarter of 2008, while the Indian arm reported a decline in profits. A company spokesman did not respond to a specific query on the likely reasons behind the dip in profit contribution, but the firm had earlier said its profit decline was because of exceptional items.
Profits apart, for many global firms, India is generating better revenues too. For the world’s largest mobile operator, Vodafone, its Indian subsidiary Vodafone Essar posted a 37.3% jump in revenues to $674 million for the quarter ended December 31, the highest in percentage terms among the 30-plus countries it operates in. Two of every three new mobile customer that Vodafone added during the quarter globally were in India.
For GlaxoSmithKline’s consumer healthcare business, India is among the top five markets globally in terms of sales. The company believes its focus on local brands is giving it the edge. “Only 5% of our sales in India come from global brands, the rest is from brands managed locally. This speaks of the potential the local arm has,” said executive vice-president for marketing Shubhajit Sen.
Coca-Cola India is another example. Although it does not have a publicly-listed arm in India and its profit contribution is not known, the company has delivered its 10th straight quarter of growth. In India, the company’s unit case volumes increased 28% in the fourth quarter. Nestle has also generated eight straight quarters of 20% plus sales growth.
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