Thanks to Covid, much of India Inc may have lost its pricing power

| Updated on August 17, 2020

Business shipping and logistics decreasing graph showing drop down.   -  istock/prachanart

Topline shrinkage for companies in the first quarter of FY21 has originated both from below-par production and demand destruction

With Covid wreaking havoc on operations and sales, it was not unexpected that revenue and profit numbers reported by India Inc for Q1 FY21 — the first full quarter to capture the impact of this pandemic — would register big setbacks. Analysis of the initial set of results by BusinessLine has duly shown that aggregate revenues for 1,495 non-financial companies fell 33 per cent year-on-year, while net profits were down 42 per cent. Revenue declines were widely pervasive, except for sectors such as banks and financials, pharmaceuticals, software and FMCGs, where companies managed to eke out revenues from essential goods and services. With the nationwide lockdown giving way to area-specific containment, supply chains did restart in parts. But with gaps remaining and pent-up demand playing a role in boosting revenues, it is difficult to say if the worst of the sales contraction is behind us. The quarter’s topline shrinkage for companies has originated both from below-par production and demand destruction. Management commentary on the year ahead suggests that while the large players do observe an unorganised-to-organised sector shift in consumer demand and sustained interest in categories such as packaged foods, nutrition, health, pharmaceuticals and personal transportation vehicles, most of them are unwilling to stick their necks out on whether there has been permanent demand destruction in the more discretionary areas of consumer spending given the job losses and pay cuts wrought by the pandemic. The body-blows taken by sectors such as hospitality, aviation, real estate and automobiles during the quarter provide ample evidence of the mood of extreme caution prevailing among consumers.

While revenues have been weak, a benign environment on input costs — thanks to commodity and fuel price meltdowns — has come to the partial rescue of manufacturing companies who have managed to improve their operating profitability by 8 percentage points year-on-year. Belt-tightening measures have ranged from disintermediation and streamlining of distribution chains to cutbacks in ads and vendor rationalisation, layoffs and pay cuts. Going ahead, as and when the Covid curve flattens, Indian companies may have to live with a new normal where the pricing power they always took for granted is no longer a given. Earnings increases may essentially need to come from leaner operations and a tight check on costs.

It is surprising that the domestic stock markets, now at an all-time high valuation, are yet to take material cues from this reality check offered by Q1 results to launch into a meaningful correction. In fact, the sobering commentary from managements of leading companies after the Q1 results makes for a sharp contrast with the analyst community, which is now breezily projecting a sharp rebound in India Inc’s earnings for FY22, after effecting hasty downgrades for this fiscal. Retail investors dabbling in equities at this juncture would do well to exercise caution both on their overall equity allocations and their preference for mid- and small-cap bets, until the cloud lifts on earnings visibility.

Published on August 17, 2020

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