Lockdown May Impact Earnings In FY22 Too, Says Nomura’s Saion Mukherjee

India’s lockdown to contain the novel coronavirus outbreak is expected to impact earnings of companies not just in the new financial year that began this month but also the next one, according to Nomura’s Saion Mukherjee.

“Effects of the lockdown will continue for at least a few quarters and there’s a significant downside risk to FY21 earnings for sure but effects could continue into FY22 as it’s difficult to say how the year plays out,” the managing director and head of India equity research at Nomura told BloombergQuint in an interview.

Businesses aren’t used to situations where there’s little or no revenue for a month or so, Mukherjee said. Except for a few essential industries like consumer goods or pharmaceuticals, where the operations would continue, all industries will go through this stress, he said. Companies that aren’t leveraged or whose fixed cost as a percentage of their revenue is relatively low would be able to manage it well, he said.

The three-week India shutdown—the most far-reaching measure by any government worldwide to curb the Covid-19 pandemic—has stalled all businesses barring essential items. The government announced a relief package worth $22.6 billion comprising cash transfers and food security to ease the economic impact of the pandemic on poor people.

Mukherjee said that the “industry-wide dislocation” will be greater in intensity as the crisis extends, resulting in stress build-up and cashflow mismatches. “Factoring these uncertainties, Nomura is forecasting a 6 percent decline in GDP in the second quarter of this calendar year.”

On RBI Measures

The central bank cut headline repo rate to its lowest since 2004 and also announced a host of measures that will inject more than Rs 3 lakh crore into the system. It also allowed a three-month moratorium on all types of term loans and working capital.

The measures announced by the Reserve Bank of India are positive in terms of bringing stability to the financial markets and avoiding any major dislocations, he said.

“But we’ve been having a very supportive monetary policy for a long time,” Mukherjee said, adding a “fair amount” of rate cuts in 2019 didn’t spur economic growth as credit flow wasn’t happening in the system. There are structural problems on the demand side and with the financial intermediaries, according to Mukherjee, which have been aggravated by the Covid-19 outbreak.

On Financial Stocks

Mukherjee said stocks of financial companies performed well, adding that some bigger companies grew rapidly as they were able to gain market share, resulting in higher market valuations. That, he said, is set for a reset.

We aren’t going to get back to the kind of expectations the street had before this particular episode (virus outbreak), Mukherjee said. “Currently both assumptions in terms of credit growth and asset quality are going to get challenged quite a lot,” he said, with stock prices already beginning to factor them in.

The Next Rally

Financials are expected to lead the next rally, he said, adding that a different set of companies may be in a position to lead.

“I do expect pockets of financials, where the company’s really come out stronger from this episode to be an important driver of rally,” he said. “Other than that, you also had areas like consumers (FMCG sector) that haven’t really corrected much, so [it’ll be] difficult for them to participate as and when the rally comes.”

Sectors like oil and gas or pharmaceuticals, he saaid, may outperform in the next one year or so.

Watch the conversation here: