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Worst’s Over, But Road To Recovery Is Long

Author: Dasari Sreenivasa Rao/Wednesday, September 16, 2020/Categories: Exclusive

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Worst’s Over, But Road To Recovery Is Long

What Can Ensure a Pandemic-Proofing Future? as sluggish consumer demand, stagnant capacity utilization, bleak cash flows, gloomy economy continue to daunt India Inc; Covid-induced disruption affecting every section of the society; Availability of vaccine is foremost important factor for speedy recovery of GDP

As vaccination for prevention of coronavirus is expected to be available by April 2021, how long the Unlock phase, to open up the economic activity, takes to bring normalcy in human life and pre-Covid level growth in gross domestic product (GDP)? Oxford’s clinical trials on vaccine for Covid-19 paused owing to an unexpected illness of a volunteer and this incident pushed the probable date for vaccine delivery by another three months to March end or April 2021. Unlock 4.0, some phrase it as Lockdown 5.0, has allowed almost every sector to commence commercial operations barring inter-state public transportation, cinema halls, swimming pools, etc. Without a proper vaccine, how India ensures safe life to its 1.3 billion people? On the other hand, the number of Covid-19 cases is on the rise as the doubling rate is now 58 days as against 84 days on August 31. The virus outbreak and its longevity are slowly leading to another contagion of caution and fear among people.

However, on a positive note, the mortality rate is very low when compared to the huge population. Considering the current situation, the IT industry extended the ‘work from home’ option till March. The work from home concept is ideal for few segments such as IT, BFSI, media, but not for the sectors like manufacturing and transportation sectors. Further, consumers have tightened their purse strings to save for a rainy day. The prevailing situation has created sluggish consumer demand across the country affecting topline and bottomline of India Inc. The prolonged poor consumer demand may put GDP growth under pressure for a few more quarters, observe economists. The Covid-induced disruption and the lockdown, are affecting every section of the society.

Weak Demand

“Weak demand is the foremost challenge confronting India Inc. It’s reversing the declining growth trajectory calls,” leading industry body Ficci expressed concerns. S&P Global Ratings in its latest announcement on September 14, 2020, projected Indian economy to contract nine per cent for FY21 as Covid-19 will restrain economic activity. S&P earlier made a forecast of (-) five per cent and now, revised it further lower. The Number of new cases per day in India reached 90,000 for the week ended September 11 as against 70,000 cases per day in August, according to WHO. Alarmingly rising number of Covid-19 cases will keep private economic activity, consumer spending, industry cash flows and investment lower for the next few more quarters. However, The US-based rating agency predicts 10 per cent growth rate for 2021-22 financial year. Though it would be positive, based on the disruption in 2020-21, the 10 per cent growth rate may not be appealing, remarked a Hyderabad-based CEO.

The 23.9 per cent contraction in the first quarter (Q1) of FY21 was more than any forecast. The continuous virus outbreak keeps consumers and corporates more cautious on spending. It continues to restrain economic activity. 

Why rating agencies turn more negative on India?

Global rating agencies – Fitch, Moody’s and Goldman Sachs- made forecasts of 10.5 per cent, 11.5 per cent and 14.8 per cent respectively. On the other hand domestic rating agencies – India Ratings and Research (Ind-Ra) and Crisil made projections on Indian GDP at 11.8 per cent and nine per cent respectively. Despite speedy recovery in industrial activity, the high frequency indicators are still suggesting lower productivity when compared with previous corresponding period. Hence, the rating agencies project negative growth for the July-September period as well.

The Prime Minister Narendra Modi-led NDA government’s gigantic economic stimulus package of Rs20 lakh crore, accounting for 10 per cent of GDP, is yet to deliver the desired results. Analysts say that monetary support was curbed by rising inflation levels. Food inflation propelled the inflation to 6.9 per cent, above the government’s target range of 2-6 per cent.

“In fact, the real monetary support is one per cent of GDP as against the projected 10 per cent. The high deficits are limiting the fiscal stimulus range. Emerging markets announced stimulus packages to the tune of over three per cent of GDP,” said a representative of the industry body in Telangana.

PBT margins under pressure

Industry observers, who hold positive views on recovery, project better performance in the second quarter (Q2) of the current fiscal. Despite India Inc is on a slow path to recovery in Q1 of FY21, the key indicators of consumer sentiment indicate that most sectors are witnessing sequential improvement since June and gradually returning to pre-pandemic levels in Q2FY21, observes ratings agency ICRA.

Considering the financial performance of 489 corporate companies, excluding the financial sector, it showed a YoY and sequential contraction in revenues with aggregate revenues contracting by 31.1 per cent on a YoY basis in Q1 FY2021. During the same period, the profit before tax (PBT) margin contracted by 498 bps on a YoY basis, and by 70 bps sequentially to multi-quarter lows of 3.6 per cent.

“Across sectors, the impact of the outbreak and lockdown was visible in the financial performance of corporate entities during the first quarter of FY21. The Covid-19 pandemic spread followed by extended lockdowns in India, affected every section of the society. The Indian corporate sector was already grappling with a weakening macroeconomic scenario and it’s been further hammered down by disruption caused by the Covid-19 pandemic,” said Icra.

The stress is clearly visible across all the major sectors, with the exception of select sectors like IT, telecom, sugar and pharmaceuticals. However, the commodity-linked sectors contracted by 34 per cent on a YoY basis with almost all the major commodity sectors, including oil and gas, metals and mining, iron & steel, cement, etc.

“Industrial and infrastructure-oriented sectors also contributed to the slowdown with 29 per cent and 38 per cent YoY de-growth respectively during the quarter, given the restrictions on activity.

As per the analysis, negligible revenues for the major part of the quarter, which impacted the absorption of fixed overheads, and lower realisation in commodity sectors especially metals and oil and gas, weighed on the profitability of India Inc, with PBT margins contracting to multi-year lows.

Industry seeks decisive action

As the Indian economy is progressively opening up in phases, businesses are seeing improvement in some of their operational parameters. However, the setback that has been caused to members of corporate India on account of Covid-19 will require a much longer period before one sees an improvement in performance on a sustained basis. Till that time, government and regulatory institutions must continue lending strength to businesses through all possible additional measures as well as improvising the already announced set of measures based on feedback from all stakeholders.

Ficci and Dhruva Advisors jointly carried out a survey to capture the feedback of industry members on how things are playing out on the ground given the successive announcements made by the government for opening up the economy as well as for stimulating growth.

The survey results indicate that weak demand continues to be the key bottleneck for companies as nearly 68 per cent of the companies have reported this to be their biggest challenge.

“In the absence of a major fiscal push on the demand side, we could end up being stuck in a quagmire of low demand and low-income cycle” observes Dr Sangita Reddy, president, Ficci.

The contraction seen in the country’s GDP in the first quarter of the current fiscal is a matter of great concern and clearly underlines the need for a major stimulus to energise and strengthen demand in the economy. These are the key messages emanating from the latest round of Ficci-Dhruva Advisors survey.

Dr Reddy further stated that “reviving the economy requires a sustained effort, especially when we have seen that in the first quarter our GDP has suffered a major blow. In the absence of a major fiscal push on the demand side, we could end up being stuck in a quagmire of low demand and low-income cycle. If we have to return to the positive growth trajectory, the time for bold and decisive action is now.”

Dinesh Kanabar, CEO, Dhruva Advisors LLP, adds: “The survey results are a reflection of the improving state of the Indian economy, post the staggered unlocking. In the next phase, it is imperative that the critical business parameters continue to improve in the future and are fast-tracked with government support and stimulus. This will help the overall Indian economy to be back on the normal growth trajectory faster. The government, by enhancing financial liquidity in the system, should specially focus on addressing weak demand, which has emerged as the foremost challenge being confronted by India Inc.”

The Survey results indicate that weak demand continues to be the key bottleneck for companies as nearly 68% of the companies have reported this to be their biggest challenge. In fact, 41% of the companies have said that their sales in August 2020 were less than 50% of their sales in August 2019. Another 21% said that sales in August 2020 were between 50%-75% of the sales recorded in August 2019.

Debt Recast In Focus

Sustained sequential recovery, along with potential relief from loan restructuring, could prevent further weakening of India Inc’s credit profile, says Icra. As India is moving from moratorium to loan restructuring, the road ahead for Indian Corporate Inc is expected to be bumpy, opine analysts as the disruption caused by the coronavirus outbreak continues to adversely impact the credit quality of India Inc.

The performance of India Inc during the first quarter of FY21 was weaker with sharp contraction seen in earnings and margin in most sectors, as revenues dwindled much sharper than the costs.

The instances and the intensity of negative rating actions could have been higher, but for the relief availed by the borrowers from lenders in the form of payment moratorium, as permitted by the Reserve Bank of India (RBI). Around 27 per cent of ICRA-rated entities availed a moratorium in payments from lenders. Icra’s statement listed sectors, in which there was a greater proclivity to avail a moratorium which included real estate, textiles, hospitality, engineering and auto ancillaries. Icra forecasts the proportion of the overall loan book under moratorium to decline to around 15 per cent by the end of Q2FY2021.

Hiring at record low

The regular industrial activity of hiring and investments is likely to slow down as uncertainties around employment and financial anxieties have reduced the spending intent amongst Indian companies and consumers as well. The five factors will decide the time, pace of India’s economic recovery, observe economists.

The five factors are: vaccine availability, fear among public, supply-chain disruptions, consumer demand and effective monetary stimulus packages. Initially, a few industries, such as hospitality and manufacturing, felt the immediate impact of the virus and the movement restrictions that followed. Possibilities of several outbreaks and prolonged pandemic may impact productivity, and capacity building across all industries, all of which may also lead to slower credit growth.

The strength of domestic consumer demand, the primary pillar to growth, will be the fourth factor. While rural demand may hold up for some time because of better rainfall and the government’s support to provide employment opportunities in rural areas, the rapid spread of the infections in urban areas may keep the demand subdued.

The writer is a business journalist with 27 years of experience

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