All eyes on May indicators

The last quarter, Q4, 2019-20 (January-March 2020) will be a washout for most corporates. The loss of 10 days in March to the lockdown, coupled to widespread anti-CAA protests through January, will have cut both consumption and production. We know Q1 2020-21 (April-June) will be even worse since the lockdown wiped out April. Sensible investors will be seeking clues as to how much of a bounce there may be once the lockdown lifts.

The Q4 results provide some indication as to how bad Q1 could get. Given losses during the ten days of lockdown in Q4, (ignoring protest impacts) we could guesstimate how much will be lost in the 30 lost days (so far) in Q1. This will not be a linear progression, of course.

Among big concerns that have declared numbers, Reliance Industries’ Q4 results indicated the uncertainty caused by oil market turmoil. RIL had to markdown the value of inventory by an exceptional Rs 4,267 crore due to falling oil prices. It also saw falling refining margins.  

This was offset to an extent by better profitability for Jio and for the retail segment. The company is raising cash via a huge rights issue and Facebook has just paid Rs 43,574 cr to buy 9.9 per cent stake in the Jio Platforms subsidiary. It should be able to reduce debt substantially post-rights and post-FB stake.

On the IT front, majors like Infosys, TCS, and Wipro have declared results.  Infosys and Wipro refused to offer guidance citing the current uncertainties. TCS believes that the pain will peak during April-June 2020. Infosys saw a little rise in profits, TCS was flat while Wipro saw profits decline 6 per cent year on year. Sector research from Gartner suggested there will be a 7 per cent reduction in global IT services spending in 2020-21. A weak rupee may help to some extent.

When it comes to domestic consumption, FMCG major, Hindustan Unilever has declared results with 1.2 per cent fall in net profits for Q4 while revenues dropped 9 per cent for Q4. At the higher end of discretionary consumption, vehicle sales have been hard-hit. There were zero, or close to zero vehicles sales in April with all factories shut after March saw a fall of over 50 per cent in car sales – remember only the last 10 days were locked-down.

In other transport-related high-speed data, passenger aviation traffic fell by 33 per cent in March, which equates to the zero traffic, post-lockdown.  Railway freight is another useful indicator. Freight movements were down 14 per cent by volumes in March and down 19 per cent by value. Goods traffic was down 42 per cent by value year-on-year for the period, April 1-20, 2020.

Power consumption in March dropped 9 per cent as industrial demand dropped in the last 10 days. There may be a 25-30 per cent fall in power usage in April. Energy exchange prices fell to Rs 0.6/ unit in early April. It’s normally upwards of Rs 2.50/ unit. Core sector production numbers indicated that steel production declined 13 per cent in March, while cement production declined 25 per cent.

At the macro level, April will be a “zero month” for steel and cement sectors and also for Railways and Aviation passenger traffic. Power usage as indicated above must have declined 25-30 per cent or more.  May could see a gradual easing of lockdowns. Examination of the high-speed data will give us a sense of where consumption is headed. But we’ll have to compare to February 2020, the last “normal” month, as well as to May 2019, to get a sense of recovery.

The crisis at the short end of the bond markets has led to a bailout, as expected. Let’s see if the Reserve Bank of India’s special window can contain the damage. Investors stuck in funds with high-risk exposures may need to wait indefinitely for returns. It’s up to the banks to judge acceptable collateral for loans to debt funds facing redemption pressure. It’s likely that the funds holding anything other than triple A- rated corporate paper will find it difficult to access bank loans.

Like Infosys and Wipro, it’s hard to offer guidance in the current phase. The high speed indicators in May as the lockdown eases may offer clues as to the strength of the future rebound.

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