While many are betting on the rural economy to spur demand — given the good rabi crop, chances of a good monsoon, increased allocations on rural employment and welfare schemes
The last five years have not been easy for corporate India but 2020-21 will be the most challenging time yet. Companies need to brace for three or four big challenges. The biggest one is decelerating demand with consumers likely to spend a lot less and also resort to down-trading. Next, they will need to deal with the disruption in supply chains partly due to the problems with China and partly due to local issues.
Together with inputs, labour too could be in short supply if the pandemic isn’t contained soon. Moreover, companies could also be short of staff for front-line operations. Again, at a time when cash flows are weak, it will become harder to access additional credit facilities as lenders turn even more risk-averse. The two pluses: commodity prices are likely to stay benign and the monsoon is expected to be a good one.
Ideally, with real interest rates slipping into the negative territory for the first time in six years, this would have been an ideal time for businesses to expand. But most companies will see a contraction in revenues in 2020-21, causing the country’s GDP to shrink by 5-5.5%. In aggregate, corporate profits crashed 38% in 2019-20 partly due to inventory losses at oil marketers, but they could shrink again 2019-20.
While there has been a recovery in both manufacturing and services in June — auto sales for instance — companies have attributed this to pent-up demand and are not yet willing to accept the trend will continue. That’s because of the fresh round of lockdowns in some big states as also the geopolitical tensions with China, both of which could continue to hurt business. Indeed, it wouldn’t be far-fetched to say demand for most goods and services will remain muted through March 2021 with a pick-up during the festive season.
While many are betting on the rural economy to spur demand — given the good rabi crop, chances of a good monsoon, increased allocations on rural employment and welfare schemes — economists have pointed out prices of farm products may stay subdued due to bountiful harvests and only a moderate increases in support prices. Sectors that employ large numbers and are catalytic for the economy, real estate and construction, for example, are unlikely to see too much improvement in activity as consumers stay away from big-ticket buys like homes.
Despite only 10 days of inactivity in Q4FY20, corporate earnings were less than ordinary. Given the deterioration in the environment since then, and the expectation that normalcy will not return before December, earnings for 2020-21 will be a washout. Analysts at Kotak Institutional Equities (KIE) expect net profits for the Nifty-50 to grow 38% in 2021-22 on the back of a fall of 3.2% in 2020-21. “We would note that the modest decline in net profits in FY2021 hides bigger decline in operating profits as FY2020 profit was impacted negatively by large adventitious and inventory losses of the downstream oil companies and RIL,” they wrote.