Big Story

Big Story | India Inc’s battle against Covid-19

The Covid-19 pandemic impacted the operations and demand in most sectors in the March quarter. Was there any revival in April and May? We sifted through exchange announcements, results and management guidance to get you some answers

Consumption: Demand is the wild card

The Covid-19 outbreak has only accelerated the consumption slowdown that has been in place in the past few quarters.

For just about 15 days of disruption, the top-line growth for companies in sectors such as automobiles, consumer durables and FMCG (fast-moving consumer goods) whose March 2020 quarter results have been announced, dropped by about 20 per cent y-o-y, driven primarily by weak volumes.

Sale of big-ticket consumption items such as automobiles took a knock, with leading companies such as Maruti Suzuki, Bajaj Auto and TVS Motor Company seeing a sharp drop of 16-30 per cent in volumes.

Even among small-ticket consumption items, relatively more discretionary segments such as personal care slowed down while foods did well. For instance, Hindustan Unilever, which earns 40-45 per cent of its revenues from personal care products, saw its overall volumes drop by 7 per cent. Marico was able to contain the volume drop at 3 per cent, thanks to its ‘Saffola’ edible oil and packaged foods portfolio. Nestle and Britannia are among the frontline FMCG companies that saw a top-line growth, thanks to their focus on packaged food products.

A cooling off in prices of certain inputs helped a few companies, but lack of operating leverage due to weak sales impacted the margins for many. Many frontline companies such as Dabur, Godrej Consumer, Gillette, Jyothy Laboratories, Blue Star, Hawkins Cookers, Hero MotoCorp and Maruti Suzuki saw double-digit falls in profits.


Companies have restarted production, although they are not operating at full capacities. FMCG companies are using new delivery modes to directly reach retailers and customers instead of depending primarily on the wholesale channel. Most players have added hygiene products such as hand sanitisers, disinfectant wipes/sprays and vegetable/fruit wash liquids to their product line in a bid to shore up volumes.

For most auto companies, 80-90 per cent of the dealerships have opened up and the initial footfalls have been encouraging, going by management commentary. Pay-cuts and job losses may curtail big-ticket spending, but the need for social distancing may aid personal vehicle sales. Value products such as commuter bikes and compact cars can do better than the rest of the categories.

With rural India relatively less affected by Covid-19, companies with good rural reach, such as HUL, Dabur, Hero MotoCorp, Maruti, and Mahindra and Mahindra (for tractors), may see better volumes.

However, it is still early days and sustenance of demand remains a wild card.

On their part, companies are cutting costs by rationalising advertising spends, overheads, etc, pruning capital expenditure as well as writing down unsuccessful investments to conserve cash in these difficult times.

For instance, Tata Motors has embarked on a cost-saving programme of ₹1,500 crore for its domestic business and of £1.5 billion for Jaguar Land Rover; M&M has written down its investment worth about ₹2,700 crore in Ssangyong and its US electric bike business; and Hero has cut its capex for this fiscal by ₹400 crore.

Banking: Asset-quality concerns weigh

The Covid-led lockdown and the slew of RBI measures have impacted the business and earnings of banks and non-banking financial companies (NBFCs). While the immediate impact of the pandemic was visible in the March quarter, in the notable slowdown in disbursements and collection activity, the real fallout of the massive disruption in economic activity across sectors and income/job losses will be known only in the coming quarters.

The six-month moratorium (until August 31) has added to the uncertainty in asset quality. Hence, aside from the commentary of the managements on the outlook for the coming year, disclosures around the quantum of loans under moratorium and the additional Covid-19-related provisions have been under focus.

For instance, while HDFC Bank’s moratorium usage was low (until March), the bank made ₹1,550 crore of provisions relating to Covid-19 during the March quarter — this should mitigate the risk of higher defaults owing to its relatively high share of credit cards and personal loans.

For Axis Bank, 25-28 per cent of customers, in value, claimed the moratorium (until April 25), which is notable. However, the bank has made large provisions of ₹3,000 crore related to Covid-19. ICICI Bank stated that 30 per cent of its loans are under moratorium (end-April), and it has made ₹2,725 crore of provisioning towards Covid-19.

SBI disclosed that about 23 per cent of its term loans are under moratorium, and has made ₹938 crore provisions related to Covid.

Overall, 30-40 percent of all loans are under moratorium currently, but this number may go up significantly with the RBI’s extension of moratorium by another three months (until August 31). For some banks, the moratorium portion has been larger owing to their exposure to SMEs (small and medium-sized enterprises) and MFIs (micro finance institutions) — 98 per cent of Equitas Small Finance Bank’s customers opted for moratorium; 100 per cent of Bandhan Bank’s micro loans were under moratorium (in April) owing to inability to physically make collections. Overall, the commentary of most banks around growth has been cautious, as the focus will continue to be on risk management in the near term.

On the NBFC front, some of the stronger and larger players, with healthy funding bases and collection networks, may be able to tide over the volatile times better. However, growth is likely to come under pressure as most managements have reiterated that their near-term focus will be on recoveries and cost efficiencies.

For instance, Bajaj Finance stated that it has taken a cautious stance and tightened underwriting norms.

It will also continue to run a high liquidity buffer, despite the impact on the cost of funds. The company had about 27 per cent of loans under moratorium (as of April-end) and has made a contingency provision of ₹900 crore for Covid.

In the case of Cholamandalam Investment and Finance Company, about 76 per cent of its customers have opted for the moratorium.

The firm has made a provision of ₹504 crore to deal with Covid-19-related stress.

Information Technology: Cost-cutting to the fore

While Indian information technology (IT) and IT-enabled services companies have weathered the Covid-19 storm well, especially from an operational perspective, their financials have not been immune to it.

With clients delaying spends and asking for discounts, cutting costs seems to be on the top of every company’s minds.

As a result, almost all of the top-tier listed IT companies have stopped hirings, suspended revenue and/or margin guidance, and even suspended pay hikes. These include Infosys, Tata Consultancy Services and HCL Technologies.

Most companies took a hit to their profits in the March 2020 quarter, except for HCL Tech, which reported a 7.7 per cent rise in its consolidated net profit. Tech Mahindra was the worst-hit, with an impairment provision of ₹218 crore leading to a 30 per cent fall net profit. Except for HCL Tech, no large-tier company managed to meet their revenue growth guidance.

Revenues from the BFSI (banking, financial services and insurance) segment, slowed or even turned negative for many IT companies. The fall of the dollar helped cushion margins, despite a fall in revenues and a spike in costs.


Research firm Gartner expects IT spending to fall worldwide by 8 per cent. The consensus among most companies is that there will be six months of pain in 2020, which may extend to the third quarter of FY2020-21.

Almost all companies see demand from customers returning to pre-Covid levels towards the end of 2020.

Companies are trying to operate nimbly, with many employees working from home. Some firms have bought a large number of laptops and software packages to enable employees to work seamlessly. This has led to a spike in costs in the quarter ended March 31, 2020.

HCL Tech, TCS, Infosys and many other companies expect consumer retail to be hit as a result of the pandemic, but demand for grocery retailers is expected to remain robust. Financial services companies are expected to go through with their technology spending commitments. Revenues from communication services have been trending well for most IT services companies, across market-caps.

Infrastructure, Real Estate, Cement: Capex and investment to take a knock

The construction segment, which had been already facing a demand slowdown in FY20, received a heavy blow on revenues in the March quarter. Just a two-week lockdown in March impacted the topline of infrastructure major Larsen & Toubro by about ₹1,800 crore. The lockdown also impacted the toll collections of companies such as Ashoka Buildcon and KNR Constructions.

For real-estate players, the two-month halt in construction activity, aside from the delay in project deliveries, also led to postponement of new launches. Sunteck Realty, for instance, has postponed the launch of new projects, such as 4th Avenue second tower (Mumbai), to Q3FY21.

Similarly, Embassy REIT’s new property delivery could be delayed by another two quarters.

While these delays could lead to further losses on account of penalties, etc, the Centre has offered temporary relief to construction contractors (working on governmental orders) and real-estate developers, for any Covid-19-induced project delays (for six months).

Those not covered by this are moving courts to seek relief under force majeure.

The top-line numbers of large commercial property developers, including Prestige Estates Projects, Phoenix Mills and DLF, received another blow in the form of a waiver in lease rental payments in their retail segments (malls). DLF estimates that the rent waiver could lead to a quarterly revenue loss of ₹125 crore.

Slow recovery

While the lockdown restrictions have now been eased in several parts of the country, resumption in construction activity will take a while due to a host of reasons — reverse migration of labour, delays in land acquisition and other approvals, material shortages, and logistics-related issues. Larsen & Toubro has reported that while about 90 per cent of its construction sites have resumed operations, only 40 per cent of its workforce is back at the sites as of the first week of June.

Companies in the construction space may also witness near-term shortages in working capital — receivables from government departments could be deferred for infrastructure players, and real-estate developers could witness delayed payments from existing home buyers, given job losses and pay-cuts across industries. In the office segment, contract renewals and construction may also be delayed.

Also, for certain infrastructure players, such as Ashoka Buildcon, who were eyeing stake sales as a means to cut down their debt, the lockdown has put such plans on hold.

Weak demand

With tight finances in both public (Central and State) and private sectors, the capex and investment cycle might take time to revive. Following the demand slump in the construction space, even cement manufacturers are expecting further decline in volumes.

In the March quarter gone by, companies reported 10-16 per cent y-o-y drops in cement sale volumes. While most cement players seem hopeful of a demand recovery in the latter part of FY21, they fear a dent in cash flows.

Oil marketing companies: Slipping, but recovering gradually

Three factors induced or exacerbated by the Covid-19 pandemic — demand destruction of oil and petro-products, crash in oil prices, and fall in refining margins — have taken a toll on oil companies. The impact was particularly acute in April and May when the pandemic-induced lockdown extended for the entire months, than in March when the lockdown began in the last week.

In April, demand for petroleum products was down 46 per cent y-o-y for IndianOil and 55 per cent for BPCL. In May, demand for petroleum products improved compared with April, but was still down about 39 per cent for IndianOil and 30 per cent for BPCL.

In particular, demand for petrol, diesel and ATF (aviation turbine fuel) fell sharply during the lockdown period as transport movement crashed, while that for LPG improved as most of the population were largely indoors.

To adjust to lower demand, both IndianOil and BPCL deferred or cancelled some crude oil cargoes and diverted some cargoes to the Strategic Petroleum Reserves of the government.

Refinery operations, while ongoing during the lockdown, were sharply curtailed due to fall in demand. IndianOil’s refinery capacity utilisation was just about 39 per cent in April, which improved to 75-80 per cent in May.

Operations at BPCL’s refineries were at about 63 per cent capacity in April, which gradually rose to 77 per cent by end-May.

With a significant fall in revenue, IndianOil’s borrowings increased substantially to meet its contractual and statutory obligations.

BPCL and HPCL, which have declared their financial results for the March 2020 quarter, have suffered inventory losses during the period due to the fall in the prices of oil and petro-products. BPCL’s inventory write-down was ₹1,081 crore while HPCL’s was ₹1,003 crore.

The oil companies optimised operations and kept the markets supplied during the lockdown. Also, the situation seems to be improving now, with the lockdown being gradually eased in most parts of the country in June and demand picking up. IndianOil says that its refinery operations are being ramped up and its borrowings have reduced significantly with increase in sales. Also, the recent increase in crude oil and petro-product prices and rupee appreciation have, to some extent, offset inventory losses and forex losses.

Though the lockdown was for only about a week in the March 2020 quarter, BPCL posted a loss of ₹1,361 crore compared with a profit of ₹3,125 crore in the year-ago period. HPCL posted a profit of ₹27 crore in the March 2020 quarter compared with a profit of ₹2,970 crore in the year-ago period.

Despite the recent gradual recovery, the oil companies will likely take a major hit in the June 2020 quarter, due to the crash in demand in April and May and lower margins.

Pharma: In good health

The pharma sector has been among the least-impacted sectors in the current meltdown. Year-to-date, the S&P BSE Healthcare index has gained as much as 21 per cent, while the Nifty 50 index has plummeted 18 per cent.

Despite being classified under the essential services category, the Indian pharma industry faced shortages in raw material, and logistics and operational issues during the initial period of the Covid-19 lockdown.

According to data released by PharmaTrac, Indian domestic pharma sales declined 4 per cent in May 2020 (y-o-y). Firms with a acute-drugs-heavy portfolio registered a drop in sales, including Alkem Laboratories, GlaxoSmithKline and Alembic Pharmaceuticals.

Exports, too, were impacted during the initial period of the lockdown due to lack of logistic support at ports and low capacity utilisation at plants. A few companies that export drugs to international markets, including Dr Reddy’s Laboratories, reported incrementally higher sales (temporary) in certain markets, including the US, Europe and Russia, due to increased panic-buying.

Firms that are engaged in manufacturing of Covid-19-related drugs are expected to benefit in terms of their profitability and cash flows. Countries around the world are resorting to medicines such as chloroquine, hydroxychloroquine (HCQ), azithromycin, paracetamol and albuterol inhaler, to help manage Covid-19.

Indian companies gain from this as India contributes 70 per cent of the world supply of HCQ. Ipca Laboratories, Zydus Cadila and Wallace Pharma are the top companies manufacturing HCQ in India.

Dexamethasone, a drug used to treat allergies and pain, is now emerging as a life-saver (though in initial clinical trials) for patients critically ill with Covid-19. In India, Zydus Cadila is the leading producer of the drug. Firms including Wockhardt, Sun Pharmaceutical Industries, Cipla and Glenmark Pharmaceuticals also manufacture and sell the drug.

Meanwhile, healthcare service providers including private hospitals and diagnostic centres such as Aster DM Healthcare and Metropolis Healthcare have been experiencing loss of business due to a sharp drop in outpatient footfalls, elective surgeries and international patients.

This will impact their revenue significantly in the near term.

Metals: Exports to the rescue

Even during the Covid-19-induced lockdown, most metal companies have continued production, albeit with reduced capacity utilisation, as shutting down factories would have led to higher technical costs. Also, most metal businesses were categorised as essential services.

Lurking uncertainty and lower demand have led to a fall in metal prices. Despite recent recovery, on the back of easing up of lockdown restrictions worldwide, the average prices of non-ferrous metals zinc, aluminium and copper — are currently lower by about 12 per cent, 12 per cent and 6.3 per cent, respectively, compared with December 2019. Steel prices are also down about 3 per cent.

The demand for metals have fallen in the domestic market and, thus, metal players have turned towards exports, despite it being less remunerative than domestic sales.

Going ahead, metal companies are likely to continue depending on exports, at least in the first half of FY21, as domestic demand from user industries is unlikely to revive in this period.

In the case of steel, integrated players such as Tata Steel, JSW Steel, JSPL and SAIL might see their domestic demand recover quicker than that of their secondary market counterparts which are reeling under liquidity crunch.

Further, the prospects of non-ferrous metal companies such as Hindalco and Vedanta depend on the revival in the demand and prices of metals, which are interlinked to the health of global economic activities. A silver lining here is that, raw material prices, too, have taken a beating, lessening the impact on profitability margins to an extent.

Published on June 20, 2020

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