While there is some chatter on recovery, high-frequency data such as Google mobility indicators show that grocery and pharma have recovered the fastest, while retail and recreation haven’t even looked up. Regardless of any uptick, all sectora are still below their corresponding pre-pandemic levels (of January-February). Many others such as power consumption, e-way bill collections, and freight movement are below their pre-Covid-19 or even year-on-year levels, indicating continuing economic contraction. With afflictions continuing to rise, economic activity will remain curbed. The second quarter would also see on-year de-growth before a mild recovery can begin in the second half of this fiscal.
There's also a lot of hype about the possibility of the rural economy doing the heavy lifting. What is your take on this?
Favourable kharif prospects due to higher sowing, coming after a bumper rabi harvest, is a reason for optimism. That said, only about a third of rural income is from cultivation. The other driver (about 5 per cent) to some extent is expected to be the Rs 40,000 crore higher allocation under MNREGA. Dairy ( about 10 per cent) is also expected to fare better, with higher milk production expected on-year. However, non-agri wages, which account for a fourth of incomes, would be under pressure due to reverse migration.
The affliction curve in the hinterland will be a crucial monitorable. Monsoon distribution also needs to be good till mid-August, while excess rains will play spoilsport. Hence, continued pick-up in rural demand in the third quarter will be a function of these parameters.
Please share your views on the impact of pandemic and lockdowns on Corporate India.
Our study of the top 800 companies (by revenue) from 30 sectors shows their revenue could drop 15-17 per cent and Ebitda by 25-30 per cent this fiscal -– the sharpest fall in a decade. The worst revenue decline prior to this has been in the range of 1-2 per cent in fiscal 2016 and then in fiscal 2020.
However, the lockdown and slow recovery will hurt revenues next fiscal, too. Utilisation levels, which were low last fiscal, will drop anew, leading to amplification of fixed cost. That would offset the impact of lower raw material prices. Several players across airlines, hotels and commercial vehicle industry may clock operating losses this fiscal.
For Corporate India, it is urban consumption that will hurt more. We analysed 40,000 companies across over 55 sectors, with a wage bill totalling Rs 12 trillion. The vulnerability assessment using revenue decline from decadal average and key credit matrices indicates 68 per cent of the companies -– accounting for 52 per cent of the wage bill mentioned -– are at high risk of pay cuts, recruitment freezes or lay-offs. That’s the kind of risk the pandemic poses.
Many banks, especially the large private ones, have raised or are raising funds despite having a decent amount of capital. Does this indicate that they are preparing for a huge wave of non-performing assets (NPAs)?
We do expect NPA levels to rise this fiscal, especially after the moratorium ends on August 31. Banks will have to prepare for additional provisioning.
But growth capital won’t be needed much this fiscal. The capital adequacy ratio of the banking system as of March 2020 was at 14.8 per cent, which is not exactly low.
We expect NPAs to rise to about 11.5 per cent, compared with 8.5 per cent as of March 2020. If measures such as one-time restructuring are announced, that will further cushion the rise in NPAs.
Sectors like aviation, hospitality, multiplexes, tourism, retail, and real estate are among the most impacted. How do you expect things to play out for these? What support will they need from the government and banking sector?
Crisil studied over 100 sectors and sub-sectors using its 5-pillar Covid-19 framework, to assess deviation in growth rates from decadal averages and default risks. It indicates many sectors will see their highest revenue declines compared with the decadal average. Aviation, hotels, real estate and media multiplexes are in the high-risk zone.
Commercial vehicles, cars and auto-components are also seeing a sharp decline in revenue, but their relatively better credit profiles reduce some risk. Most stakeholders here are expecting some government support over the medium term.
Transport operators may need a one-time restructuring of loans after the moratorium ends to ensure their lower utilisation levels do not translate into defaults.
Real estate may need sops such as developer loan restructuring along with incentives to revive demand. Till demand recovers, developer loan-book worries will continue.
Airlines would seek excise relief on aviation turbine fuel (currently at 11 per cent) and deferment in navigation and landing fees to improve their short-term cash flows.
What is the trend on the ratings front? How many companies have become vulnerable?
Our credit ratio in the second half of last fiscal was 0.77, meaning downgrades outnumbered upgrades. The first quarter of this fiscal shows material impact of the pandemic with the credit ratio dropping further, with far lower upgrades than downgrades. Timely initiatives taken by policymakers, such as the loan moratorium and change in default recognition, have helped.
Companies in sectors such as airlines, gems and jewellery, auto dealers and real estate could face considerable credit pressure because of the discretionary nature of their goods and services and weak balance sheets.
Pharmaceuticals, fertilisers, oil refineries, power, and gas distribution and transmission, because of their essential nature and government support, will continue to be highly resilient.
From here, three things are critical: demand recovery, regularisation of working capital cycle, and sustained improvement of cash flows and liquidity.
Equity markets have seen some recovery in recent months. How is it playing out for the debt markets?
Timely liquidity measures such as the TLTRO by the RBI, the partial credit guarantee scheme and special liquidity scheme announced by Ministry of Finance, and measures taken by Sebi have helped the orderly functioning of domestic debt markets.
The sovereign and higher-rated/ liquid segments, which comprise a large part of the market, were largely at their pre-Covid levels.
However, there are concerns in lower rated instruments, especially in the non-AAA and illiquid segments. More efforts will be needed to overcome the current trend of risk aversion.
Any bright spots and downside risks you see, which the markets or industry may not be prepared for?
Given the demand stress, credit outlook for fiscal 2021 is negative with downgrades likely to significantly outnumber upgrades. Credit quality will be particularly impacted in sectors facing suppressed/subdued demand on account of tightening of discretionary spends. Balance sheet strength remains a key monitorable.
Some of the critical downside risks can emerge from second wave of spread of virus, monsoon impact, and a slower-than-expected pick-up in consumption.