Hindustan Unilever CMD Sanjiv Mehta’s observations, post the FMCG giant’s results announcement last Thursday, that there could be more disruption and it is difficult to say when the recovery will set in, pretty much sums up the mood in corporate India.
Grappling with uncertainty about how much damage the pandemic could do to demand, both at home and abroad, CEOs are simply waiting for more evidence before they put out any growth targets. As TCS MD and CEO Rajesh Gopinathan said the storm could get worse before it gets better. His comment to the effect that clients are stressed and looking to restructure and re-price contracts is a sign that realisations will be under pressure.
Wipro, too, highlighted several concerns, including instances of clients reducing budgets, cutting discretionary spends, pricing discounts, restructuring existing IT spends and even extended payment terms. The pressure on prices would not be limited to the IT space, but would be seen across sectors as purchasing power falls and companies attempt to push through volumes. Indeed, the chunky Rs 3,000-crore pandemic-related provision made by Axis Bank suggests there’s plenty of pain ahead.
While lockdown has obviously derailed growth, the fact is the economy was slowing well before this. Adani Power, for instance, reported a consolidated net loss of Rs 1,313 crore for Q4FY20, mainly due to higher operating costs though total income slipped to Rs 6,328 crore, a fall of about 20% y-o-y. The steep drop in prices of some commodities — crude oil especially — has resulted in players like Reliance Industries missing profit estimates, thanks to a Rs 4,270-crore inventory loss. However, the fall will benefit user industries and companies like the aviation sector.
While sluggishness in sales was seen, across a host of goods and services, even in the first two months of the quarter, the inactivity in the last ten days of March exacerbated the earnings. Surprisingly, analysts still have a fairly robust growth estimate for 2020-21 at 20-25% although since February 1, these have dropped off by about 11%.
Credit Suisse believes that at this stage the consensus 20-25% annual growth in the index EPS is at odds with the risk of a potential GDP decline in FY21, notwithstanding the weak base of FY20. Earnings estimates for metals and industrials have seen steepest cuts while financials and energy have dominated the fall in the index EPS.
Producers of building materials, analysts say, will continue to see a fall in volumes through 2020. Volumes at cement producer Ambuja Cements declined 10% y-o-y during the quarter, driving down revenues by down 3% y-o-y; at ACC, volumes fell by 12% y-o-y while revenues dipped 11% y-o-y. While construction activity would be badly impacted going ahead, analysts believe consumption on staples will bounce back relatively soon. HUL’s volumes fell a sharp 9% y-o-y but this was primarily due to problems with the supply chain and retail outlets being closed, analysts said.