Article:
Recently, an analysis by an investment information and credit rating agency shed light on the impact of the prolonged nationwide lockdown on the Indian corporate sector. A study of around 500 companies revealed significant contracting revenues and stressed sectors, with a few exceptions. The pandemic’s fallout has had varying effects on different industries, altering consumer behavior and market dynamics.
Revenues Contract across Majority of Sectors
The study revealed that out of the 500 companies surveyed, aggregate revenues contracted by 31.1% year-on-yer basis in the first quarter of Financial Year 2021. This contraction was most noticeable in consumer-oriented sectors where revenues reduced to almost half of the previous year’s levels. Industries such as airlines, hotels, retail, automotive, and consumer durables were hit hardest due to their reliance on discretionary spending, non-essential purchases like recreation and entertainment items that consumers buy after paying necessary expenses.
However, FMCG and consumer foods sectors were less impacted owing to their essential nature. Overall, the contraction paints a bleak picture of an economy grappling under the burden of the pandemic-induced lockdown.
Commodity-linked Sectors Bear the Brunt
Commodity-linked sectors, those dependent on the commodity market for raw products like oil, gold, coffee, reported a contraction of 34% on a year-on-year basis. This contraction was due to subdued volumes and benign commodity prices triggered by reduced realizations. Industrial and infrastructure-oriented sectors also witnessed de-growth of 29% and 38% respectively in the quarter due to restrictions on activity.
Struggles of the Banking Sector
The banking sector, too, has been affected by poor credit growth and rising Non-Performing Assets (NPAs). Retail loans have suffered, increasing credit costs and creating obstacles for banks and Non-Banking Financial Companies (NBFCs).
One of the main reasons for this setback has been the restrictions on manufacturing, industrial, construction, and consumption activities for most of Q1 FY2021 due to the nationwide lockdown. This negative impact on the financial performance of the Indian corporate sector was also fueled by demand-side issues, primarily due to customer wariness caused by an uncertain economic environment and erosion of purchasing power.
Consumer Confidence Takes a Hit
Hitherto regarded as one of India’s most lucrative assets, its large consumer base showed diminished optimism about the present situation and future expectations. According to data from the Reserve Bank of India, consumer confidence collapsed, with both the current situation index and the future expectations index falling below 100, indicating a pessimistic outlook.
Impact on Company Profits and Earnings
Despite subdued raw material prices and favourable rupee movement benefiting select sectors like IT, negligible revenues for a major part of the quarter led to companies struggling to cover operational costs. Lower profit realization in commodity sectors, particularly metals and oil and gas, resulted in Profit Before Tax margins contracting to multi-year lows. A recovery is expected to be gradual, and it might take some time before pre-pandemic levels are achieved.
The Road to Recovery
The projected revival hinges on several factors. NPAs for non-banking finance companies are expected to increase, with microfinance, MSME loans, and wholesale/developer funding witnessing a sharp spike. Normal monsoons with sufficient rainfall are anticipated to boost investment sentiments and job creation, crucial for sustained earnings growth. Electricity generation might see a 6-8% growth, while capital goods sector revenue may decline by 5%, indicating a not so broad-based recovery.
In the pharmaceuticals sector, new product launches might drive a 15% growth. Meanwhile, the recovery in movement of goods on National Highways is apparent, with volumes reaching 85% of pre-pandemic levels in July 2020, reflecting in railway freight and port tonnage data.
Government Support: A Silver Lining
Despite the grim scenario, the government’s support and interventions offer a glimmer of hope. Healthy rural demand backed by normal monsoons, robust Kharif sowing, higher allocations for the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) and MSME guarantee loans have contributed towards boosting overall demand and facilitating economic recovery.
However, despite faster recoveries in certain sectors, the rapid proliferation of the pandemic and regional lockdowns threaten to disrupt supply chains and consumer sentiments further, emphasizing the need for caution moving forward.
