How Bad Has Covid-19 Been For India Inc.’s Earnings?
It was already a tough year for Indian companies amid a slowing economy. And then came the severe blow from the Covid-19 pandemic.
It was already a tough year for Indian companies amid a slowing economy. And then came the severe blow from the Covid-19 pandemic.
The outbreak of the novel coronavirus had a significant bearing on the January-March quarter earnings of Indian corporates, according to ICRA Research. “Profitability was hit due to weak sales, subdued realisations in select sectors, and impairment of investments and business provisions on account of the pandemic.”
An analysis of 184 Indian companies, excluding the financial sector, by ICRA showed that aggregate revenue in the fourth quarter fell 2.9% over last year, it said in a statement. But the hit wasn’t just limited to the topline. Operating margins narrowed to a multi-quarter low of 7.1%.
Absolute earnings of corporate India contracted by 22% in Q4, ICRA said.
To be sure, earnings growth in India had been slowing even before the pandemic arrived. The rating agency’s analysis showed revenue growth stood at 2.4% and 2.1% in the second and third quarter, respectively.
Yet, the nationwide lockdown towards the end of March implemented to curb the spread of the virus brought economic activity to a grinding halt. Factories and outlets were shuttered, while construction activity was stopped. Bulk of that impact is yet to come, ICRA said.
Consumer and commodity-linked sectors were the worst hit. Major consumer-oriented sectors like FMCG, consumer durables and automobiles saw a decline or marginal growth in sales due to subdued sentiments and increased wariness, said Shamsher Dewan, vice president of corporate sector ratings at ICRA.
“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 and gas entities, metals and mining and iron and steel,” he said.
Weaker Credit Profiles
A contraction in earnings also meant that interest costs for servicing debt for most companies went up, ICRA noted.
The interest coverage ratio, or the ability to make interest payments, fell to 3 from 3.6 at the start of the fiscal. Interest costs for companies rose 13% year-on-year mainly due to rising debt and Ind-AS adjustments.
Some sectors, however, are much more vulnerable than others. Power and real estate saw interest cover slip below 1, highlighting serious credit concerns, ICRA said. Airlines, telecom and construction companies also saw large increases in interest costs.
Slow And Painful Recovery
ICRA said there has been a slight recovery in demand and economic activity since May. However, it’s nowhere near normal levels.
Movement of goods has improved but it still remains at less than 55% of the pre-lockdown levels, which too was sub-optimal, ICRA said. Besides, even with the reopening of industrial units challenges pertaining to raw material, labour availability and logistics will make the path to normalcy a “slow and painful” one, it said.
“Going forward, the priority of India Inc. would be on managing liquidity, cutting costs and improving digital infrastructure, wherever possible,” Dewan said.
“Pay reduction, employee rationalisation and renegotiating on vendor agreements like lease rentals have already been effected by many corporates,” he noted. “However, despite these efforts, credit implications of the pandemic will remain significant for many entities.”