Some sectors may take long to recover even post lockdown: Rating agencies

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Published: April 29, 2020 2:01 AM

Permanent demand loss is more likely in sectors such as retail trade, education, air, rail, road& water transport, logistics, real estate, entertainment, hotels & restaurants and other personal discretionary services, Crisil said.

The medium-risk sectors, including automobile manufacturers & auto-ancillaries, construction, consumer durables and power face a relatively lower degree of business disruptions and credit risks. (Representative image)The medium-risk sectors, including automobile manufacturers & auto-ancillaries, construction, consumer durables and power face a relatively lower degree of business disruptions and credit risks. (Representative image)

Even after the Covid-related lockdowns are eventually lifted, some sectors may take a long time to recover from the shock of the disruption, rating agencies said on Tuesday. While Icra said that it is undertaking a review of its portfolio of ratings by assessing risk both at the sector level as well as the entity level, Crisil said some sectors could face a permanent loss of demand as a result of Covid-19.

Icra is working on a heat map of sectors, marking out the high-risk, medium-risk and low-risk sectors, with focus of analysis on the first two. Similarly, entity-level risk mapping involves risk categorisation in terms of most vulnerable, moderately vulnerable and relatively less vulnerable entities. The high-risk sectors, such as aviation, gems & jewellery, tourism and hotels and microfinance institutions are the ones that face severe business disruption over the immediate term and where the recovery is more likely to be prolonged.

The medium-risk sectors, including automobile manufacturers & auto-ancillaries, construction, consumer durables and power face a relatively lower degree of business disruptions and credit risks. The low-risk sectors like agri-products, education, fast-moving consumer goods (FMCG) and telecom are unlikely to face material business disruption, or a material increase in credit risks over the near term, triggered solely by the Covid-19 crisis, Icra said.

Aside from undertaking a review of the liquidity position of the rated entities over the near term, Icra said it may also be redrawing its projections for various cases, by assuming that a ‘business as usual’ operating environment may not return soon. This analysis would be an additional input for deciding upon rating actions.

Jitin Makkar, head credit policy, Icra, said that subsequent to the agency’s FY20 ratings action, the Covid-triggered crisis has led to a widespread deterioration in the credit quality of India Inc. “The credit challenges are overwhelming and would impact the credit profiles of a large number of entities across sectors in an unprecedented manner,” he said.

Crisil said that some sectors from the manufacturing and services categories could face a permanent loss of demand. In the industrial segment, sectors such as food products, cement, steel and other items used in construction, export items such as gems & jewellery and textiles face the threat of permanent loss of demand, or a scenario where even pent-up demand may not compensate for the loss. In other sub-sectors, such as consumer durables, car retailing and discretionary goods, there could be demand postponement.

“But the services sector could be hit harder because a larger part of it either support industrial activity or are discretionary in nature,” Crisil said in a report, adding that some of this, however, will be offset by growth in telecom revenue due to higher usage of data and higher media consumption.

Permanent demand loss is more likely in sectors such as retail trade, education, air, rail, road& water transport, logistics, real estate, entertainment, hotels & restaurants and other personal discretionary services, Crisil said.

“So far, the services sector – which accounts for 41% of total exports 0ù has been resilient. But a recession in the advanced economies would dampen the prospects for information technology (IT)-IT-enabled services and tourism, and bring down service-exports growth,” the agency said in the report.

Some domestically-led services could continue to bear the brunt for an extended period even after the lockdown is lifted, as consumers will be averse to public transport — including air transport — and places of entertainment business such as malls and cinema halls, hotels and restaurants, among others, Crisil observed.

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