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ICRA: Covid-19 infects Corporate India's financial performance in Q4 FY2020
ICRA notes, that the major impact on revenues came from commodity-linked sectors, which witnessed a contraction of 15% in revenues on a Y-o-Y basis on account of tepid realisations and subdued volumes.
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The Indian Corporate sector, which was already reeling under the impact of multiple headwinds since the beginning of the FY2020, faced a major blow in the form of the covid-19 pandemic outbreak during Q4 FY2020; and thereby had a significant bearing on its performance. An ICRA analysis of financial results of 184 companies in the Indian Corporate Sector (excluding financial sector entities) showed a Y-o-Y and sequential contraction in revenues with aggregate revenues contracting by 2.9% on a Y-o-Y basis in Q4 FY2020. During the same period, the EBITDA margin contracted by 30 bps on a Y-o-Y basis, and by 120 bps sequentially to 16.8%, while PBT margins fell to multi-quarter lows of 7.1%. Absolute earnings of the Corporate India contracted by 22% and 12% in Q4 FY2020 and FY2020, respectively. Further, the impact is expected to be even more pronounced during Q1 FY2021, given the stringent two-month long nationwide lockdown in the country during the quarter, it was also visible to some extent in the Q4 FY2020 performance of India Inc., with both revenues and profitability weakening on a Y-o-Y as well as sequential basis.
Exhibit: Trend in aggregate revenue growth of sample of 184 companies
Source: Ace Equity, ICRA research
Commenting further, Mr. Shamsher Dewan, Vice President - Corporate Sector Ratings, ICRA said, “The financial performance of the Indian Corporate sector in Q4 FY2020 were primarily hurt by consumer and commodity-linked sectors, both of which were impacted significantly as the pandemic started spreading rapidly. Despite some uptick in the initial months of the last quarter, major consumer-oriented sectors such as FMCG, Consumer Durables, Auto OEMs and Ancillaries, reported either decline or marginal growth in sales volumes, weighed down by subdued consumer sentiments and increased wariness. This was further compounded by the nationwide lockdown imposed in the country from March 25, 2020. On the other hand, tepid realisations driven by softening commodity prices (in line with global trends), coupled with subdued volumes in light of the pandemic outbreak and macroeconomic slowdown, resulted in revenue contraction for major commodity sectors, including oil & gas entities, metals & mining and iron & steel.”
Exhibit: Trend in aggregate PBT margin for sample of 184 companies
Source: Ace Equity, ICRA research
ICRA notes, that the major impact on revenues came from commodity-linked sectors, which witnessed a contraction of 15% in revenues on a Y-o-Y basis on account of tepid realisations and subdued volumes. Consumer sentiment too was weighed down by increased wariness as the pandemic started spreading rapidly, reflecting in the Y-o-Y contraction of 9% in revenues from consumer-oriented sectors. Additionally, demand from the infrastructure and industrial segments was down, with the existing weakness in macroeconomic environment, further aggravated by the pandemic outbreak.
Consequently, the profitability of India Inc. was impacted adversely due to the subdued demand, tepid realizations in commodity sectors, and negative operating leverage. This was visible in the EBITDA margins, though the same are strictly not comparable with corresponding previous due to the implementation of Ind AS 116, whereby operating leases have been capitalized. The reduction in lease rentals on account of the same has contributed positively to EBITDA, despite which the margin contracted, reflective of the sharp pressure on operating profitability during the quarter. The PBT margins contracted by approximately 200 bps, both on a Y-o-Y and sequential basis, to multi-quarter lows of 7.1%.
The interest coverage ratio of ICRA’s sample, adjusted for sectors with low debt levels (IT, FMCG and Pharma) also witnessed a Y-o-Y and sequential weakening to 3.0x from 3.5x in Q3 FY2020 and 3.6x in Q4 FY2019, highlighting the pressure on credit profiles of entities. The interest coverage was impacted by weakening earnings. Interest costs increased by a sharp 13% on Y-o-Y basis on account of a) increase in debt levels and b) Ind AS 116 adjustments, on account of which lease rentals have been bifurcated into interest and depreciation costs. Sectors like airlines, telecom and construction saw significant increase in interest costs on a Y-o-Y basis on account of the same. At the same time, EBITDA contracted due to negative operating leverage. Interest cover in select stressed sectors like Power and Real Estate even slipped below 1.0 time, highlighting serious credit concerns.
Exhibit: Trend in interest coverage ratio for sample of 184 companies
Source: Ace Equity; ICRA research
“Over the immediate future, India Inc will deliver an even weaker performance during Q1 FY2021 given aggravation of existing challenges. With the country going into a two-month long nationwide lockdown at the end of March 2020, the major part of Q1 FY2021 has seen negligible manufacturing, infrastructure development and consumption activities. Although the production and consumption of essential goods continued during the lockdown, the impact on production and consumption of discretionary items has been significant, both due to the restrictions in place, as well as the bleak consumer sentiment,” adds Mr. Dewan.
Early indicators of consumer sentiment indicate at a marginal recovery in May 2020 vis-à-vis April 2020, as the lockdown restrictions started gradually easing, although significantly lower than normal. For instance, data on movement of goods on National Highways, as indicated by the Fastag and E-way bill volumes, shows significant improvement in May vis-à-vis April (3.0-5.0x), as confusions with respect to transportation of non-essential good eased. However, it remains quite subdued, at 50-55% of pre-lockdown levels, which was sub-optimal in the first place. Furthermore, with industrial and manufacturing activity only gradually scaling up, given challenges on raw material and labour availability, logistics, and subdued demand, the path to normalcy is expected to be slow and painful.
On the consumption front, data for Q1 FY0221 suggest some recovery in demand towards the end of May 2020 as compared to April 2020, with pickup in credit card spending, food deliveries etc. The improvement was especially pronounced in rural areas and smaller towns, buoyed by a healthy rabi harvest and associated cash flows. Accordingly, tractor sales almost bounced back to pre-covid levels in May 2020, with some OEMs even reporting Y-o-Y growth in volumes, albeit marginal. However, the demand in urban centres, especially metros, continue to remain subdued, given the continued rapid proliferation of the pandemic.
Additionally, while demand of essential goods has more or less reverted to normal levels, aided by supply chain normalisation, and improved adoption of digital channels, people continue to place discretionary purchases on the back burner. This was especially true for large-ticket purchases. For instance, retail sales of passenger vehicles and two-wheelers at merely 12-14% of pre-lockdown levels in May 2020. Given the layoffs, pay-cuts and general uncertainty regarding job stability, this trend is likely to continue over the near-term, in absence of any significant demand triggers. Other sectors like aviation and hospitality are also expected to see a longer timeline to recovery, given the continued consumer wariness on non-essential travel.
In terms of investment-related sectors like construction, the immediate impact is negative given that even post partial relaxations of the lockdown from April 20th, the pace of construction activity has been slow due to reverse migration of labour. Additionally, fiscal constraints, especially of state governments, are likely to hamper the pace of execution over the immediate future.
“Going forward, the priority of India Inc. would be on managing liquidity, cutting costs and improving digital infrastructure, wherever possible. Pay reduction, employee rationalization and renegotiating on vendor agreements like lease rentals has already been effected by many corporates. However, despite these efforts, credit implications of the pandemic will remain significant for many entities,” adds Mr. Dewan.