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India Inc's Growth Dilemma: Strong Finances Amid Weak Demand, Says Nuvama

A new report from Nuvama paints a nuanced picture of corporate India's health. Companies have emerged from the Covid period with stronger finances, but this is largely due to cost-cutting, not booming sales. The real problem is stubbornly weak demand, which limits opportunities for expansion and makes new investments risky. This situation could actually hurt the country's long-term economic growth potential if it persists.

Key Points: Nuvama Report on India Inc's Post-Covid Strength and Weak Demand

  • Post-Covid financial strength stems from restructuring, not strong demand growth
  • Weak demand, below 10% CAGR, is driven by soft exports and slow wage growth
  • Risky reinvestment led to falling profitability in IT, QSR, and chemicals sectors
  • Sectors like power and autos now face rising supply and peak margins
3 min read

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

Nuvama report reveals Indian companies are financially stronger post-Covid but face limited growth due to persistently weak demand, risking future potential.

"India Inc as of FY25: All dressed up, but nowhere to go - Nuvama Report"

Mumbai, December 15

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

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Reader Comments

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Rohit P
Spot on about the weak wage growth! Salaries in most sectors have been stagnant for years, while living costs have shot up. How can demand grow if people's purchasing power isn't increasing? The government needs to focus on creating more high-quality jobs, not just celebrating GDP numbers.
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Aman W
The comparison to the 2000s is telling. Back then, it felt like everyone was doing better. Now, the growth seems concentrated at the very top. The report's warning about sectors like autos and hospitals is crucial for investors. Maybe the bull run in these stocks is nearing its end.
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Sarah B
As someone working in the IT sector, I've seen this firsthand. After the initial post-Covid boom, projects have slowed down and hiring is cautious. Companies expanded capacity expecting the surge to continue, but it didn't. Now we're in a wait-and-watch mode.
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Karthik V
"All dressed up, but nowhere to go" – what a perfect summary! 🇮🇳 The focus has been too much on efficiency and not enough on creating new markets or boosting rural demand. Exports are soft globally, so we need a stronger domestic consumption story. Time for a strategic shift.
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Nikhil C
While the analysis is good, I respectfully disagree that growth options are "limited." There's massive potential in green energy, EVs, and digital infrastructure. The problem might be that companies are chasing the same old sectors instead of innovating for new demand. The opportunity is there for those who can create it.

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