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Coronavirus pandemic whipsaws India Inc as companies brace for earnings hit, debt crisis
As the virus continues to spread in the absence of medical ammunition, the dominant view is that a mere supply-side issue has developed into a broader demand-side issue.
Published: 14th March 2020 03:55 PM | Last Updated: 14th March 2020 03:55 PM | A+A A-
For representational purpose. (Photo | Madhav K)
By Sesa sen
Express News Service
Empty airline seats, cancelled hotel rooms and missed social gatherings have become a part of a normal life as both families and companies work together to contain the spreading of the infectious coronavirus (COVID-19).
While companies have their hands full ensuring necessary precautions for employees while also managing the demand-supply scenario, consumers are curtailing household spending. Behind this whirlwind of activity, however, lies a tale of risk and loss.
Industry observers pointed out that increasing instances of clampdown both within and outside India, that have led to curtailing of consumer mobility and deferral of spending, is set to hit corporate profits this year.
ALSO READ: Washing your hands isn't enough to beat coronavirus, here's one more thing you must do!
“Lower business volumes and occupancy, and sub-optimal efficiencies will impact the profitability of companies. While some affected companies may initiate cost-curtailment measures, these may not be enough given high fixed costs,” said Subodh Rai, senior director, CRISIL Ratings. Clearly, there aren't a lot of nerves about the ability of companies to generate enough revenue to cover their costs and this, in the process, could hit the economy hard.
Anticipating logical earnings hit in the quarters to come, many firms have already warned investors of the threat the virus poses. Supply constraint, increase in customs duty and higher logistical cost of airlifting components have also triggered a price hike taken by a few companies.
“Godrej will be taking a 2-3 per cent price hike in ACs in the second half of March, while prices for other consumer durables will be revised later,” Kamal Nandi, business head and executive vice-president, Godrej Appliances, said.
ALSO READ: Apple to close all stores outside China until March 27
Nandi, who is also the president of Consumer Electronics and Appliances Manufacturers Association (CEAMA) has warned that shortage of stocks for ACs and refrigerators is bound to hit revenue for summer, albeit the extent of loss can not be ascertained yet.
As the virus continues to spread in the absence of medical ammunition, the dominant view is that a mere supply-side issue has developed into a broader demand-side issue.
As it is, consumption has become the key driver of economic growth over the last few years despite weak household income growth. The only way consumption can grow amid weak income is by taking on debt and essentially leveraging up.
But if income continues to remain weak, consumers may not be keen to take on new debt, fearful of finding it tough to repay loans in the future.
ALSO READ: Flipkart offers work from home for employees with small children
Given that the debt level has spiked over the last few years, households can not be counted upon to spend their way out of the prevailing slowdown. Private final consumption expenditure, a measure that reflects consumption spending of households, improved marginally at 5.9 per cent in Q3 of FY20, but “it was not sufficient to stem the slide witnessed over the last one year,” noted Prithviraj Srinivas, chief economist, Axis Capital. Given the tepid demand no sign of consumption revival in sight, India Inc may be headed for a unforgettable quarter unless the virus is contained.
On the other hand, investors fear that businesses that have borrowed heavily, especially energy and airline firms, will struggle to pay their debts.
While carmakers, electronics groups and chemicals firms remain vulnerable because of disrupted supply chains, rating agencies are already sounding the alarm on companies that are most exposed to travel cancellations and consumers’ deferred discretionary spending. Among the worst hit is the travel, tourism, hospitality and airline sectors.
ALSO READ: Coronavirus spread takes a toll on food services sector, says National Restaurant Association of India
A weak rupee will be a major tailwind for the IT sector even as other cost pressures are increasing. Shutdown of normal business is also shrinking demand for energy, sending oil prices sinking and intensifying pressure on indebted oil-and-gas production firms. Then, a gyrating stock market only further worsens the distress.
For context, the loss numbers are enormous. “The ban on travel to India for a period of 1 month which is bound to have a cascading economic impact on the hotel, aviation and travel sector and is estimated to cause a direct loss of an estimated Rs 8,500 crore," said Rajesh Mudgill, secretary, Indian Association of Tour Operators. The services sector alone contributes over 50 per cent to India's GDP.
Cellular Operators Association of India (COAI), which represents Reliance Jio, Bharti Airtel and Vodafone Idea, has also “cancelled a string of upcoming meetings in India of the 3 GPP (3rd Generation Partnership Project) on telecom standards, as international participants won't be able to come due to business travel restrictions,” said Rajan Mathews, director-general of the lobby group. COAI said it has lost about Rs 15 lakh in advances that won’t be refunded following the cancellation of the Mobile World Congress due to the epidemic.
One may not be surprised if the Indian Premier League (IPL) 2020 gets cancelled altogether resulting in a substantial loss given the lack of advertisement revenues, which would have come otherwise. In 2019, the IPL saw over Rs 550 crore spent on advertising. Companies such as Vivo, Zomato and Swiggy were among the ones who capitalized from the T20 extravaganza in 2019.
On the downside, companies are more likely to lay off workers, delay investments and cut costs while struggling to meet debt payments under the pressure of a virus-induced economic slump. All of which could deepen any economic downturn.
https://www.newindianexpress.com/bu...ace-for-earnings-hit-debt-crisis-2116709.html
As the virus continues to spread in the absence of medical ammunition, the dominant view is that a mere supply-side issue has developed into a broader demand-side issue.
Published: 14th March 2020 03:55 PM | Last Updated: 14th March 2020 03:55 PM | A+A A-
For representational purpose. (Photo | Madhav K)
By Sesa sen
Express News Service
Empty airline seats, cancelled hotel rooms and missed social gatherings have become a part of a normal life as both families and companies work together to contain the spreading of the infectious coronavirus (COVID-19).
While companies have their hands full ensuring necessary precautions for employees while also managing the demand-supply scenario, consumers are curtailing household spending. Behind this whirlwind of activity, however, lies a tale of risk and loss.
Industry observers pointed out that increasing instances of clampdown both within and outside India, that have led to curtailing of consumer mobility and deferral of spending, is set to hit corporate profits this year.
ALSO READ: Washing your hands isn't enough to beat coronavirus, here's one more thing you must do!
“Lower business volumes and occupancy, and sub-optimal efficiencies will impact the profitability of companies. While some affected companies may initiate cost-curtailment measures, these may not be enough given high fixed costs,” said Subodh Rai, senior director, CRISIL Ratings. Clearly, there aren't a lot of nerves about the ability of companies to generate enough revenue to cover their costs and this, in the process, could hit the economy hard.
Anticipating logical earnings hit in the quarters to come, many firms have already warned investors of the threat the virus poses. Supply constraint, increase in customs duty and higher logistical cost of airlifting components have also triggered a price hike taken by a few companies.
“Godrej will be taking a 2-3 per cent price hike in ACs in the second half of March, while prices for other consumer durables will be revised later,” Kamal Nandi, business head and executive vice-president, Godrej Appliances, said.
ALSO READ: Apple to close all stores outside China until March 27
Nandi, who is also the president of Consumer Electronics and Appliances Manufacturers Association (CEAMA) has warned that shortage of stocks for ACs and refrigerators is bound to hit revenue for summer, albeit the extent of loss can not be ascertained yet.
As the virus continues to spread in the absence of medical ammunition, the dominant view is that a mere supply-side issue has developed into a broader demand-side issue.
As it is, consumption has become the key driver of economic growth over the last few years despite weak household income growth. The only way consumption can grow amid weak income is by taking on debt and essentially leveraging up.
But if income continues to remain weak, consumers may not be keen to take on new debt, fearful of finding it tough to repay loans in the future.
ALSO READ: Flipkart offers work from home for employees with small children
Given that the debt level has spiked over the last few years, households can not be counted upon to spend their way out of the prevailing slowdown. Private final consumption expenditure, a measure that reflects consumption spending of households, improved marginally at 5.9 per cent in Q3 of FY20, but “it was not sufficient to stem the slide witnessed over the last one year,” noted Prithviraj Srinivas, chief economist, Axis Capital. Given the tepid demand no sign of consumption revival in sight, India Inc may be headed for a unforgettable quarter unless the virus is contained.
On the other hand, investors fear that businesses that have borrowed heavily, especially energy and airline firms, will struggle to pay their debts.
While carmakers, electronics groups and chemicals firms remain vulnerable because of disrupted supply chains, rating agencies are already sounding the alarm on companies that are most exposed to travel cancellations and consumers’ deferred discretionary spending. Among the worst hit is the travel, tourism, hospitality and airline sectors.
ALSO READ: Coronavirus spread takes a toll on food services sector, says National Restaurant Association of India
A weak rupee will be a major tailwind for the IT sector even as other cost pressures are increasing. Shutdown of normal business is also shrinking demand for energy, sending oil prices sinking and intensifying pressure on indebted oil-and-gas production firms. Then, a gyrating stock market only further worsens the distress.
For context, the loss numbers are enormous. “The ban on travel to India for a period of 1 month which is bound to have a cascading economic impact on the hotel, aviation and travel sector and is estimated to cause a direct loss of an estimated Rs 8,500 crore," said Rajesh Mudgill, secretary, Indian Association of Tour Operators. The services sector alone contributes over 50 per cent to India's GDP.
Cellular Operators Association of India (COAI), which represents Reliance Jio, Bharti Airtel and Vodafone Idea, has also “cancelled a string of upcoming meetings in India of the 3 GPP (3rd Generation Partnership Project) on telecom standards, as international participants won't be able to come due to business travel restrictions,” said Rajan Mathews, director-general of the lobby group. COAI said it has lost about Rs 15 lakh in advances that won’t be refunded following the cancellation of the Mobile World Congress due to the epidemic.
One may not be surprised if the Indian Premier League (IPL) 2020 gets cancelled altogether resulting in a substantial loss given the lack of advertisement revenues, which would have come otherwise. In 2019, the IPL saw over Rs 550 crore spent on advertising. Companies such as Vivo, Zomato and Swiggy were among the ones who capitalized from the T20 extravaganza in 2019.
On the downside, companies are more likely to lay off workers, delay investments and cut costs while struggling to meet debt payments under the pressure of a virus-induced economic slump. All of which could deepen any economic downturn.
https://www.newindianexpress.com/bu...ace-for-earnings-hit-debt-crisis-2116709.html
