The first of a three-part series highlights the issues faced by the auto, financial services, retail, and metals sectors, the expected recovery time, and how major companies will fare amid this slowdown
The 22 per cent rise in the Nifty after the sharp fall in March comes amid monetary and fiscal stimuli by various countries and a calibrated relaxation by the Indian government and the central bank. Still, most economic indicators are flashing red, highlighting the pain in the economy. This also indicates why the Nifty is still 26 per cent down from its 52-week high. Barring a few linked to agriculture, the recovery time for most sectors varies from the second half of FY21 (starting festive season) to eight quarters. The first of a three-part series highlights the issues faced by the auto, financial services, retail, and metals sectors, the expected recovery time, and how major companies will fare amid this slowdown.
Auto & Auto Components
With factories shut, supply chain dislocated, and showrooms closed, auto companies generated zero sales in April, and the June quarter will be a washout. Though companies are resuming production, given the limited retail network, and weak consumer sentiment due to job losses and falling incomes, an uptick is unlikely before the festival season, which starts in September.
If things improve, the sector still could post a year-on-year volume dip of 10-15 per cent in FY21; in the worst-case scenario, the fall could be 40 per cent. Trucks will bear the biggest brunt, while tractors and entry-level motorcycles should see a quicker recovery on account of rural exposure and down-trading. A surge in vehicle costs because of regulatory norms (BS-VI, insurance) is another reason for analysts preferring segments at the lower end of value chain.
Rural-segment players, such as Hero MotoCorp, M&M, and Escorts, may face less impact. Within two-wheelers, exporters Bajaj Auto and TVS Motor could be hit as major markets in Africa, South America, and Southeast Asia are hit by a combination of lockdowns and slowing economy because of falling oil prices.
Fixed costs as a percentage of sales range between 7 per cent (Bajaj Auto) and 34 per cent (Motherson Sumi). Given lower volumes and negative operating leverage, companies with high debt and fixed costs could face difficulty. Those sitting on cash, such as Bajaj Auto, Hero MotoCorp, Eicher Motors, and Balkrishna Industries are better placed.
Ram Prasad Sahu
Banking & Financial Services
A decade-long bull rally in private banks came to an abrupt halt as the Covid-19 pandemic and lockdown gripped the markets. Public sector bank stocks, too, have not been spared. And, the road to recovery looks painful, given the unprecedented growth slowdown.
As the best-case scenario, analysts expect 7-11 per cent loan growth in FY21. Given that disbursements have been practically nil in April, a single-digit growth looks a possibility.
Improvement in these assumptions, though, is possible if the government provides a big relief package across sectors, especially for small and medium businesses. Even then, the 16-20 per cent past growth run-rates may be history.
Borrowers have time until the end of May to exercise moratorium on loan instalments. Until now, the regulatory leeway hasn’t seen much takers. Once the moratorium is lifted, how seamless it would be to start collecting dues from customers is unknown because of the current economic conditions. In absence of a broad economic stimulus, as well as an extension of the regulatory leeway, and given the 30-35 per cent moratorium that some private banks are witnessing, bad loans may spike for banks. Therefore, whether the sector is poised for a recovery in FY22 is contingent on how the asset quality of banks pans out in the financial year and its consequent impact on their capital adequacy.
Troubles for non-banking financial companies (NBFCs) are worse, as they are faced with a liquidity crisis deeper than that in September 2018. With over Rs 1 trillion of repayment obligations looming, cash flow disruptions could be severe.
Meanwhile, the growing notion is to consider stocks in the asset management, and life and general insurance sectors as alternatives for banks and NBFCs. However, these, too, are facing growth and profitability headwinds. How the unstable equity and debt markets, and weakening domestic savings bite into earnings of AMCs and insurers needs monitoring.
Retail & QSR
Retailers and quick service restaurants (QSRs) will not only see their businesses take a hit, but the threat of a reduction in consumer discretionary spending is also looming large.
Baring a couple, most are seen reporting a loss or a decline in profit in the March quarter. Experts estimate a sharp decline in FY21 growth rates, as recovery is expected only after December.
For retailers, the impact would vary depending on products and distribution mix. “Retailers of non-essential products would see a bigger impact as a recovery in discretionary demand would take at least six months after the lifting of the lockdown,” says G Chokkalingam, founder & managing director of Equinomics Research & Advisory Services.
Edelweiss Securities, thus, has cut its FY21 revenue estimates by 4-7 per cent for food and grocery retailers (essentials), such as Avenue Supermarts and Future Retail, and by a sharper 16-24 per cent for others. QSRs may see some support from online distribution and relatively fast recovery. But, given the high fixed costs, the impact on earnings of retailers and QSRs could be much larger. While analysts believe large companies may renegotiate lease rentals, the extent of benefit is unknown. Leverage and promoter pledging (Future Retail and Future Lifestyle) are other concerns. According to an Edelweiss report, their (Future group companies and Aditya Birla Fashion) gross debt to operating profit ratio was over two times, according to the April-September 2019 numbers.
Shreepad S Aute
Metals & Mining
Demand for both ferrous and non-ferrous metals has taken a significant hit during the lockdown. While demand for long steel products remains subdued as most construction activities have come at a standstill, flat steel (used by automobile and white good manufacturers) demand is absent because of the closure of consumer industries.
Steel prices, which had fallen by Rs 1,500 per tonne in March before the lockdown started, are expected to fall by another Rs 1,000-1,500, say analysts.
The demand recovery for flat products, which hinges on the sales of automobile and white goods, is not seen before the festive season after the Monsoons. As construction activities are likely to remain subdued in the first half, the same holds for long steel products.
For the non-ferrous sector, challenges are bigger. Not only has the lockdown impacted demand, but realisations too. Realisations are down by a higher margin. International prices of aluminium, zinc, lead and copper prices, which were down 9-21 per cent in the March quarter, are down another 7-13 per cent in the ongoing quarter. So the road to recovery for profits will be longer, say analysts.
Among companies, Hindalco is better placed. As its US arm, Novelis, is a convertor of metals into value-added products, it is largely insulated from metal price movements, thereby providing cushion to earnings.
In the ferrous space, Tata Steel and JSW Steel are better placed to benefit from demand recovery, while Jindal Steel with expanded capacity will benefit from the scale of operations.
With the industrial output and power generation seen recovering only in the second half, gains are unlikely to come anytime soon for Coal India. High coal inventories only indicate that stress will be prolonged.
LTP is loss to profit; 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; Compiled by BS Research Bureau
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