The next six months will test India Inc’s abilities to negotiate the near-collapse in demand, falling revenues and weak cash flows.
As it exits 2019-20, India Inc’s biggest challenge in the months ahead will be redeeming bonds and meeting other loan obligations at a time when cash flows will be hard to come by. Corporate bonds worth approximately Rs 92,000 crore and Commercial Paper worth around Rs 78,000 crore are coming up for repayments towards the end of May.
The three-month breather on loan repayments—to banks and NBFCs– will help but only temporarily; given how highly leveraged companies are, deterioration, in what are already very fragile balance sheets, can’t be ruled out. The recent spate of downgrades– more than a dozen a day in the last three months –has made banks even more risk-averse and except for the top –tier players, few can hope for fresh lines of credit.
Early Q4FY20 results are an indication of how disruptive the pandemic can be. At Titan, for instance, revenues from the jewellery segment were down 5% y-o-y for the March quarter, but revenues in January and February had increased by 16.5% y-o-y. At Marico too, the India business reported a low single-digit fall in volumes in the quarter with much of the damage being done in March. One survey of corporate houses showed that 80% of manufacturing companies had more than a month’s inventory when the lockdown took effect. Sectors such as automobiles, construction materials and metals have seen their volumes fall sharply while realizations are down for metals and upstream oil companies.
With the economy now estimated to grow only at a nominal 5-6% in 2020-21– or a real rate of 1-2%-corporate India is in for a rough ride. The shock from the Covid-19 pandemic will hurt spends on both discretionary items and capital goods as layoffs and pay-cuts ravage the economy.
Data from CMIE shows unemployment spiked to over 23% as of April 5 versus the 6-8% range pre-pandemic; in rural India it increased to 20% while in urban areas it soared to 31%. That will send private consumption plummetting notwithstanding any stimulus the government might unveil; much of the money would be used for sustenance especially since the recent damage to crops and shutting of the mandis will hit farm incomes.
The next six months will test India Inc’s abilities to negotiate the near-collapse in demand, falling revenues and weak cash flows. Conserving cash and covering fixed costs would be critical at a time when receivables will be delayed. Smaller companies would be hit by their buyers invoking force majeure clauses. While they have been reining in costs for several quarters now expenses –on employees, marketing and promotions—could be slashed.
With spends on durables limited, and enough surplus capacity, investments by the private sector could drop slowing order inflows at capital goods firms. CMIE data shows projects worth only Rs 76,400 crore were completed in the March, 2020 quarter against the scheduled Rs four lakh crore.
While the quantum of new investment announcements made in March 2020 is comparable to the levels seen in recent quarters, many of these are likely to be cancelled. It’s unlikely we will see project starts at anywhere close to the ten-quarter average of Rs 3.3 lakh crore anytime soon.
Kotak Institutional Equities (KIE) expects net profits for its universe to decline 14% year-on-year; excluding banks and financials the fall would be a steeper 36% y-o-y. The brokerage estimates net profits for the BSE-30 will increase 12% y-o-y and that for the Nifty-50 will decline 16% y-o-y. The performance of the BSE-30 would be better than that for the Nifty-50 since downstream companies –BPCL, IOCL –and Tata Motors which are components of the Nifty-50 but not of the BSE-30, will report a sharp drop in net profits.