Covid-19 impact: Demand collapse derails infra, services sectors' growth

With monsoon less than a month away, a revival is expected only in the December quarter for most of these sectors
The second of a three-part series looks at the impact of the Covid-19  pandemic on the infrastructure, capital goods, cement, and services sectors. While a slowing economy had led to deceleration in demand, the lockdown has increased the pain, besides resulting in labour shortages and delay in project execution. With monsoon less than a month away, a revival is expected only in the December quarter for most of these sectors. The services sector, which includes hotels, real estate, and aviation, is affected the most as a sharp dip in demand is worsened by the high fixed-cost base. This results in negative operating leverage, pushing up losses, and may lead to higher debt. Consolidation will help sector leaders.

Capital goods, Cement & Infrastructure

The lockdown has turned up the heat on the cement, infrastructure, and capital goods space, which was already under pressure because of a slowdown in economic growth. Cement demand has almost collapsed after housing, infrastructure, and industrial activities came to a near standstill. Cement sales in April were only 15-20 per cent of the usual average. May, too, is expected to be a washout. 

While there is no activity in the urban housing space that holds the key to drive the June quarter demand, infrastructure project execution, which has been relaxed since late April, isn't much of a help. Labour availability continues to pose challenges, and will affect project execution for both infrastructure and capital goods companies, and in turn, cement demand.

For infrastructure and capital goods companies, project delays will not only impact near-term revenues but also medium-term profitability. Thus, investors may look at cost rationalisation measures that will support margins and companies with stronger balance sheet. Some of these estimates are yet to factor in the pain on account of the Covid-19-led disruption.

In capital goods, analysts prefer L&T, Siemens and ABB, which appear better placed to tackle the situation.

Since the June quarter remains the key for progress in projects and is followed by the Monsoons when most construction activities remain affected, a revival is likely only from the December quarter onwards. Cement demand is expected to pick up only after project execution gains momentum.

Real estate, hotels & aviation

After a sharp decline in Q4FY20, residential real estate may see more pressure because of inventory overhang, weak consumer confidence, and stressed balance sheets. While commercial realty is in better shape, lower demand and higher supply over the next two years will likely keep lease rentals under pressure. The sector is expected to recover by FY22. Given these pressures, companies with low leverage and/or a sizeable proportion of rental income, such as Oberoi Realty, Godrej Properties, DLF, Phoenix Mills, and Prestige Estates, may recover faster. 

The hotel sector is one of the worst-placed because of the sharp drop in demand from individuals, as well as corporates. High fixed-cost nature of the business, largely due to employee costs (about 30 per cent of expenditure), will increase losses as revenues dry up. Further, the ongoing capex and operating losses on account of low occupancies and room rentals once the lockdown is lifted may increase debt. These factors could push growth to FY23; investors should avoid the space. 

The lockdown has led to the collapse of revenues for the aviation sector and this could worsen going ahead. Staff, aircraft lease rentals, and interest costs are expected to rise going ahead. Revival hinges on early resumption of air travel and CRISIL expects the sector will take six-eight quarters to reach the pre-pandemic levels and pegs losses at Rs 17,000 crore for FY21. With cash on books, IndiGo is the best play on recovery.

PTL: Profit to loss; loss indicates the company reported or is expected to post a loss in FY20 as well as in FY21; EPS is earnings per share; Source: Bloomberg, analyst reports; compiled by BS Research Bureau

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