How Covid 19 is impacting key Indian industries

Impact of coronavirus pandemic will vary with sectors, and will be influenced by the extent of trade disruption, social distancing and the resultant economic slowdown, says CRISIL report.
How Covid 19 is impacting key Indian industries
Impact of coronavirus pandemic will vary with sectors, and will be influenced by the extent of trade disruption, social distancing and the resultant economic slowdown, says CRISIL report. 
The Novel Coronavirus (Covid-19) has cast a long shadow over a much-anticipated mild recovery in the Indian economy in fiscal 2021, with the World Health Organization (WHO) declaring it a pandemic. 
External risks to global growth has increased significantly now.  S&P Global foresees a recession in the US and the Eurozone, and has its forecast for China’s growth slashed to 2.9 per cent from 4.8 per cent announced on March 5. 
Domestically, some hit to consumption demand because of social distancing is likely, though it is too early for that to reflect in data. Currently, the other downside to growth is also due to the financial sector stress now percolating to private sector banks. 
In view of this, CRISIL has cut its base-case gross domestic product (GDP) growth forecast for fiscal 2021 to 5.2 per cent, from 5.7 per cent announced recently. This factors in the huge uncertainty because of Covid-19, with risks to the forecast tilted downwards. The forecast will be reassessed continuously as new information becomes available. 
A serious downside to our base case can emerge from two developments. One, the pandemic is not contained by April-June 2020 globally, and makes the global slowdown more severe. And two, it spreads rapidly in India, affecting domestic consumption, investment, and production. These would further hurt confidence and the financial markets.
Adding credit pressure
Credit quality pressures on India Inc, which has been rising because of economic slowdown and consumption slump is set to intensify with the Covid-19 pandemic. The impact will vary with sectors, and will be influenced by the extent of trade disruption, social distancing and the resultant economic slowdown. 
Based on the depth and timing of impact, sectors witnessing credit quality pressures have been broadly classified into three. Those facing significant loss of revenue and profit have been categorised as ‘high risk’, while others are termed ‘moderate’ and ‘low impact’. Those in the high-risk bucket are further classified based on the timing of impact. Firms facing high near-term risks are more exposed to liquidity stress.  
High risk impact if the pandemic prolongs 
While Covid-19 may not have a direct impact, the evolving global and domestic economic slowdown will impact demand and realisation in steel, gems & jewellery, construction & engineering, and textiles sectors. 
  • Construction & engineering sector: The sector has seen credit pressure this fiscal because of slowdown in public spending and stretched working capital cycles. With state resources focused on fighting Covid-19 and issues of labour availability, order execution and/or receivable collections are likely to be impacted, adding to working capital pressure. 
  • Steel: Demand slowdown in the construction and automobiles sectors have affected the steel sector significantly this fiscal. Continuing slowdown in these sectors owing to Covid-19 and other factors, besides difficulty in realisations, could add to the credit pressure on steel makers. 
  • Gems & jewellery: Mired by challenges in fund raising and market dislocation in key consuming countries such as Hong Kong, companies have been in significant credit distress over the past two fiscals.  The situation has exacerbated, especially for diamond exporters since January this year because of demand slowdown following Covid-19.
  • Textiles: Ready-made garment makers dependent on export markets are facing intense competition, which is impacting their credit profiles. With key export markets such as the US and the EU facing headwinds, there could be significant demand pressure for exporters including cotton yarn exporters. Already, the business performance of cotton yarn exporters has been impacted in the fourth quarter of fiscal 2020 because of disruption in supplies to China, which accounts for a quarter of such business. Further social distancing measures could also weaken demand for domestic apparel retail, which, in turn, would darken the cautious credit outlook.
Moderate impact 
Sectors facing limited supply disruptions of a couple of quarters, and those with strong balance sheets would see moderate impact on credit profiles. These include automobiles and auto components.  
  • Automobiles: Domestic automobile demand is expected to be impacted for an extended period as consumers cut discretionary spending. The sector was already seeing slack demand and higher prices because of compliance with Bharat Stage VI emission norms. However, strong balance sheets of automobile manufacturers will insulate credit profiles to some extent. 
  • Auto-components: In fiscal 2020, the credit quality of auto component makers was impacted because of slowing demand for automobiles and sluggish exports. Those with limited diversification or recent capacity additions were hit the most. Domestic and export demand are seen subdued next fiscal. Disruptions in supply of critical components from China is expected to be limited to a few players which are not significant in the affected segment. Players with diversified profiles and strong balance sheets would weather near-term challenges better, while the rest will remain vulnerable next fiscal.
  • IT: Travel restriction could impact revenues, a significant portion of which is typically from exports. While the credit profiles of large-sized IT firms would be supported by strong balance sheets and sizeable cash surpluses, mid-sized ones could face delays in obtaining new deals and possible liquidity challenges if the pandemic prolongs. 
  • Petrochemicals: Realisations are expected to be under pressure given demand challenges in key consuming countries like China, and global oversupply. Large players with strong balance sheets and parent support would weather the challenges better, while others would be vulnerable to sharp variations in realisations.
  • Renewables: Under-construction projects to be commissioned by July and August of 2020 are at risk of missing their respective scheduled commercial operation dates if trade with China continues to be affected for long. That is because India sources ~80 per cent of its solar modules from China. Business has been impacted due to measures implemented to combat the spread of the virus. Operating projects may be relatively safe as exposure to further trade is limited  
  • Consumer durables and electronics: India imports 45 per cent of completely built units of consumer durables from China. In addition, India also imports bulk of consumer durable components from there. Besides, 70-80 per cent of mobile phone components/CKD kits are supplied by China. Supply disruptions from China have led to depleted inventories for Indian consumer durable firms in categories like mobile phones, air-conditioners and electronic components, as well as TVs. These segments saw price hikes of 3-7 per cent in March 2020. Most large consumer durables firms have very strong balance sheets and surplus liquidity. While the Covid-19 will impact business levels, strong balance sheets should provide offset and help sustain credit profiles in near term. 
Low impact 
Companies in sectors that are domestically reliant and not exposed to significant demand pressures may not be impacted significantly owing to Covid-19. Some of these include: 
  • Pharmaceuticals: India is a net importer of pharma bulk drugs from China. The country accounted for 68 per cent of Indian imports by value last fiscal. Domestic drug makers had already sourced their raw material and created sufficient inventory for two-three months because of holidays in China. We are seeing Chinese production facilities coming back on stream as the impact of Covid19 abates and supplies resume. A few players have seen price escalation in some bulk drugs and intermediates due to supply constraints, which could temporarily impact their margins. However, credit quality of pharmaceutical companies is expected to remain by and large stable, especially for large pharma, who benefit from strong balance sheets.
  • Power (other than renewables): Given the domestic-focused nature of operations, there is no significant impact envisaged. Existing challenges in terms of fuel supply, weak financial risk profile of state distribution companies and stressed power assets would continue to play a role in the credit quality of these players.
The base case assumptions the impact of Covid-19 will be restricted to 1-2 quarters in India. If the pandemic prolongs, more firms would see downward pressure on credit profiles.
Article Courtesy: “The Covid-19 fallout: Quantifying first-cut impact of the pandemic” of CRISIL - An S&P Global Company (March 19, 2020)
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