Expect fiscal constraints among states
The Indian Corporate sector, beaten by economic slowed down, would need to focus on managing liquidity, cutting costs and improving digital infrastructure, wherever possible, said Shamsher Dewan, ICRA’s Vice President – Corporate Sector Ratings.
“Going forward, the priority of India Inc. would be on managing liquidity, cutting costs and improving digital infrastructure, wherever possible,” he stressed in comments on the businesses.
Pay reduction, employee rationalization and renegotiating on vendor agreements like lease rentals have already been effected by many corporates.
“However, despite these efforts, credit implications of the pandemic will remain significant for many entities,” Dewan pointed out.
In terms of investment-related sectors like construction, the immediate impact is negative given that even post partial relaxations of the lockdown from 20 April 2020, the pace of construction activity has been slow due to reverse migration of labour.
Additionally, fiscal constraints, especially of state governments, are likely to hamper the pace of execution over the immediate future, he added in a note on India Inc on 18 June 2020.
The financial performance of the Indian Corporate sector in Q4 FY2020 was primarily hurt by consumer and commodity-linked sectors, both of which were impacted significantly as the pandemic started spreading rapidly.
Despite some uptick in the initial months of the last quarter, major consumer-oriented sectors such as FMCG, Consumer Durables, Auto OEMs and Ancillaries, reported either decline or marginal growth in sales volumes, weighed down by subdued consumer sentiments and increased wariness.
This was further compounded by the nationwide lockdown imposed in the country from 25 March 2020. On the other hand, tepid realisations driven by softening commodity prices (in line with global trends), coupled with subdued volumes in light of the pandemic outbreak and macroeconomic slowdown, resulted in revenue contraction for major commodity sectors, including oil & gas entities, metals & mining and iron & steel.”
Over the immediate future, India Inc will deliver an even weaker performance during Q1 FY2021 given aggravation of existing challenges.
With the country going into a two-month-long nationwide lockdown at the end of March 2020, the major part of Q1 FY2021 has seen negligible manufacturing, infrastructure development and consumption activities.
Although the production and consumption of essential goods continued during the lockdown, the impact on production and consumption of discretionary items has been significant, both due to the restrictions in place, as well as the bleak consumer sentiment, observed Dewan.
Early indicators of consumer sentiment indicate at a marginal recovery in May 2020 vis-à-vis April 2020, as the lockdown restrictions started gradually easing, although significantly lower than normal.
For instance, data on the movement of goods on National Highways, as indicated by the Fastag and E-way bill volumes, shows significant improvement in May vis-à-vis April (3.0-5.0x), as confusions with respect to the transportation of non-essential good eased.
However, it remains quite subdued, at 50-55% of pre-lockdown levels, which was sub-optimal in the first place. Furthermore, with industrial and manufacturing activity only gradually scaling up, given challenges on raw material and labour availability, logistics, and subdued demand, the path to normalcy is expected to be slow and painful.
On the consumption front, data for Q1 FY0221 suggest some recovery in demand towards the end of May 2020 as compared to April 2020, with a pickup in credit card spending, food deliveries etc.
The improvement was especially pronounced in rural areas and smaller towns, buoyed by a healthy rabi harvest and associated cash flows. Accordingly, tractor sales almost bounced back to pre-covid levels in May 2020, with some OEMs even reporting Y-o-Y growth in volumes, albeit marginal.
However, the demand in urban centres, especially metros, continue to remain subdued, given the continued rapid proliferation of the pandemic.
Additionally, while the demand of essential goods has more or less reverted to normal levels, aided by supply chain normalisation, and improved adoption of digital channels, people continue to place discretionary purchases on the back burner.
This was especially true for large-ticket purchases. For instance, retail sales of passenger vehicles and two-wheelers at merely 12-14% of pre-lockdown levels in May 2020.
Given the layoffs, pay-cuts and general uncertainty regarding job stability, this trend is likely to continue over the near-term, in absence of any significant demand triggers. Other sectors like aviation and hospitality are also expected to see a longer timeline to recovery, given the continued consumer wariness on non-essential travel. fiinews.com
