IT: Thriving amid the pandemic

After sailing in uncharted waters for a while, IT services companies, particularly Tier-1 players, reported healthy growth of revenues and improved profit margins for the quarter ended September 2020.

This, coupled with decent earnings visibility, suggest Indian IT is one of the very few sectors that have managed to successfully weather the pandemic.

The Big Four — Tata Consultancy Services (TCS), Infosys, HCL Technologies and Wipro — recorded revenue growth (in constant currency terms) of 3-7 per cent q-o-q on the back of good growth in demand across all geographies.

Digital drive

With Covid-19 prompting demand for contactless touch-points and higher digital interface, companies in sectors such as retail, consumer packaged goods, financial services and healthcare ramped up their spendings on digital offerings. Cloud services, IoT and 5G services have also been much in demand as companies migrated to work-from-home.

Manufacturing and retail were among verticals that were severely impacted during the first quarter of FY21.

The September quarter saw many leading players report record deal-wins from new clients, widening their client roster.

While revenue growth turned out better than expected, sharp cutbacks in travel costs, changes in the offshore-onsite mix, apart from a fall in overheads and attrition rates, contributed to operating profit margin gains.

The leading companies lifted their operating profit margins by 20-260 basis points sequentially over the quarter, to 19-26 per cent. While some of these cost savings (such as onsite costs) may dwindle as operations normalise, some (such as travel costs and overheads) may be retained.

Leading players have announced a resumption in pay hikes and hiring.

However, higher dividends and share buy-back offers announced by Tier-1 IT companies suggest muted revenue prospects and lower capex requirements in the near future.

Guidance from the sector has also been positive as managements are upbeat about technology spends and margins going ahead. Infosys and HCL Tech upgraded their revenue and margin guidance for FY21, and Wipro restarted its practice of giving quarterly revenue guidance. TCS does not give any revenue or margin guidance.

During the market correction in March 2020, the S&P BSE IT index had lost 30 per cent from the levels seen in February, but the index has since recovered the losses, with returns of a whopping 92 per cent till date.

Infrastructure: Brick by brick

After a complete standstill in the initial days of the Covid-induced lockdown, the construction sector is yet to returnto normalcy.

Road contractors, who were among the first to be permitted to resume work during the second phase of the lockdown, continued to report slower execution owing to shortage of labour.

Consequently, the pace of highway construction also slowed by 14.5 per cent (y-o-y) in the first half of FY21.

With 90 per cent labour availability and drop in toll collections, PNC Infratech reported a 10.7 per cent y-o-y drop in revenues in the September quarter. The infrastructure behemoth Larsen & Toubro, with a well-diversified order book, reported a 12 per cent y-o-y drop in revenues in the September quarter.

Delayed execution in the construction segment impacted the sale volumes of allied sectors such as cement and steel as well. Despite a healthy pick-up in rural demand, cement production dropped 25 per cent (y-o-y) in the first half of the fiscal. Domestic consumption of steel also fell 7-10 per cent in the September quarter.

However, major companies in the cement and steel sectors reported better- than- industry volumes due to consolidation in the industry. Shree Cement and UltraTech Cement (with a combined market share of about 40 per cent) saw volumes increase by 14 per cent and 8 per cent (y-o-y), respectively, in the quarter ended September 2020.

Large steel players such as Tata Steel, JSW Steel and JSPL, too, performed better than the industry — both sequentially and on a year-on-year basis — in the September 2020 quarter, in terms of sales volumes.

In the June quarter, when the fall in domestic steel demand was worse, some of the steel players increased their share of export sale volumes significantly (export sales compensated the fall in Indian steel demand only to an extent). Now, with the rise in domestic demand, the focus has been shifted back to the Indian market.

Strong prospects

Order inflows for many infrastructure companies remained healthy in the first half of FY21. Emkay Global, in its recent report, stated that the government’s tendering activity increased by 57 per cent y-o-y from April to September 2020, with major orders flowing from railways, roadways, irrigation, and water treatment segments.

Despite continuing weakness in private capex, the Centre’s increasing thrust on infrastructure (from theNational Infrastructure Pipeline (NIP) to the recent stimulus announcements around the Pradhan Mantri Awas Yojana (PMAY), etc) can augur well for companies in the construction space, in the coming quarters.

In the real-estate space, lower home loan rates have helped ramp up demand, particularly in the affordable housing segment. Add to this, the increased funding announced by the Centre and tax sops on discounted property sales, it could turn out to be a shot in the arm for the sector that has been ailing with high levels of unsold inventory. However, increasing risk-aversion of banks and unwillingness of real- estate players to opt for steep discounts may act as a bummer.

Besides, the healthy demand pipeline has also helped keep the prices of construction materials buoyant. The domestic HRC (hot roiled coil) prices rose by around ₹ 5,500 to ₹ 41,250 per tonne (SteelMint data) from July to September-end. Average cement prices (pan-India) are also up 2-6 per cent y-o-y in FY21 thus far.

Energy: Getting charged up

The imposition of the nationwide lockdown on March 25 brought all non-essential industrial and commercial activities to a standstill. India’s electricity consumption thus contracted sharply in April 2020 — down 23 per cent year-on-year to 85 billion units. Industrial and commercial activities account for two-thirds of the country’s power demand.

Electricity consumption declined 16 per cent year-on-year in the June 2020 quarter. The decline in the September 2020 quarter was under 1 per cent (y-o-y). With the economy opening in stages and power demand picking up, especially in the industrial States, September became the first month when electricity consumption rose compared with the same month last year.

The demand contraction in the June 2020 quarter translated into reduced electricity generation and lower plant load factors for power companies. This is reflected in the y-o-y revenue decline in the June 2020 quarter for major power producers such as NTPC, Adani Power, Tata Power and JSW Energy.

Profitability, too, took a hit for most, during the quarter. The State-owned NTPC and Power Grid Corporation of India (PGCIL), the country’s principal transmission utility, also had to make provision for rebates to State distribution utilities (discoms). The two companies, however, operate under a regulated return model and are largely immune (particularly PGCIL) to an adverse impact on their earnings for the long term.

With demand recovering, many large power generation companies saw their September 2020 quarter revenues recover both sequentially and compared with September last year. This aided the improvement in the companies’ profitability, too, in the latest quarter. Furthermore, work on projects stranded earlier due to the halt in construction activities has resumed.

On the power distribution side, the significant loss in demand from the higher tariff-paying industrial and commercial customers after the national lockdown brought the already financially weak State discoms under further stress. This triggered government support for discoms on multiple fronts — permission to defer payments to power generators, waive-off of late payment fee, and loans for liquidating their outstanding dues to power producers. The outstanding dues of discoms at ₹126,493 crore as of end-September 2020 were 32 per cent higher than that in March-end.

The turnaround in power demand has also been reflected in the significantly improved dispatch of coal by Coal India and the resultant rise in the company’s revenue in the September 2020 quarter, both sequentially and y-o-y. Nearly 80 per cent of India’s power supply comes from coal- and gas-based thermal power plants. Overall, while the power sector may not be ready for a growth surge yet, it is certainly recharging after the Covid hit.

Fuelling up

The massive demand destruction due to the Covid-related lockdowns resulted in demand for the two key transportation fuels — petrol, and diesel — fall off the cliff in April this year, crashing by up to 50 per cent year-on-year. Since then, the gradual unlocking of the economy saw demand for the fuels make a slow recovery over the months, though it was still lower y-o-y.

It was only in September 2020 that demand for petrol finally rose again compared with the year-ago period, up about 3 per cent. Diesel consumption followed suit in October with a rise of about 7 per cent y-o-y; petrol demand, too, continued to rise with demand in October up about 4.5 per cent y-o-y.

Overall, during the half-year ended September 2020, petrol demand fell about 21 per cent y-o-y to 12.1 million tonnes (mt), while diesel demand fell about 25 per cent y-o-y to 30.9 mt. But the growth in both fuels in October points to green shoots.

The other key transportation fuel, aviation turbine fuel (ATF), though continues to languish — demand in April to September 2020 was down about 70 per cent y-o-y to 1.2 mt, and October demand was also down 49 per cent y-o-y due to restrictions on domestic aviation capacity deployment.

Consumption: Will it last?

Consumption took a hit in the March and June quarters, but things seem to be changing for the better. Sustainability of this revival is key, especially in big-ticket items such as cars and bikes.

The slowdown in auto sales worsened due to the lockdown in end- March, and with production and dealership shutdowns continuing well into May, automobile manufacturers saw no respite in the June quarter.

In the circumstances, essentials such as food and hygiene products saved the day for FMCG players. Nestlé, the maker of Maggi noodles, saw sales go up by almost 11 per cent year-on-year in the quarter ended March 2020, while Britannia saw its volumes move up by 21.5 per cent in the three months ended June, fuelled by rise in in-home biscuit and snack consumption during the lockdown.

To push sales, FMCG companies launched disinfectant sprays and wipes, fruit and vegetable wash, sanitisers, etc, and were quite successful in generating demand here.

With gradual unlocking of the economy, signs of revival in consumer segments cannot be missed in the latest September quarter earnings. Hero MotoCorp, the market leader in commuter bikes, for instance, saw sales move up by 23.7 per cent y-o-y in the September quarter and more than triple from the June quarter.

Major listed FMCG players have seen 10 per cent y-o-y growth in revenues in the September quarter and 12 per cent growth in reported profits, on an aggregate. Companies such as Britannia and Dabur, with their play on immunity-boosting offerings during Covid times, have seen strong growth in these periods.

Two trends dominate the revival.

One, better rural consumption is helping demand as management commentary from most companies indicate that their rural sales growth has outpaced that of the urban in the last few months. Maruti Suzuki, the market leader, saw 41 per cent of its September quarter sales from the rural segment, vs 38.5 per cent a year ago. Strong demand for tractors is driving volumes for Mahindra & Mahindra, thanks to good monsoons, agri reforms and good sowing.

Two, small-ticket discretionary consumption has revived. Segmental revenues in beauty and personal care (40 per cent of total revenues) for Hindustan Unilever, for instance, dropped by only 0.2 per cent y-o-y in the September quarter, compared with the steeper 12 per cent year-on-year fall seen in the three months ended June. Skin-cleansing and hair care products have shown a pick-up in demand. Godrej Consumer also reported a pick-up in hair colour sales in the latest quarter.


With people no longer restricted to their homes, revival in small-ticket discretionary items sales is here to stay.

Car and two-wheeler sales have shown 14-16 per cent y-o-y volume growth even in October, thanks to the onset of the festival season. Pent-up demand from lockdown and need for personal mobility amid the pandemic among first-time buyers has driven auto sales so far. It needs to be seen if this will sustain. There has also been divergence between the primary sales reported by the players and the much more muted retail sales, as captured by vehicle registrations.

Most consumption stocks, in the meantime, have gone up sharply since the March lows, on high growth expectations, and their valuations have expanded. A lull in off-takes post the festival season will be a dampener for investors.

Financials: Worst is yet to come

The financial sector, comprising banks and non-banking financial companies (NBFCs), has been hard hit by the business disruptions caused by Covid-19. Apart from borrowers finding it difficult to service loans, lenders have had to cope with regulatory interventions that required them to grant a six-month loan moratorium to all term loan- takers from March 1 to August 1, with a Supreme Court order extending the period.

Despite the stimulus measures by the Centre and the RBI, bank credit growth slowed to just 5.8 per cent y-o-y in September 2020.

While industrial credit remained muted, personal loans grew at a healthy 9.2 per cent.

With banks becoming increasingly risk-averse, gross bank credit actually fell by 0.9 per cent between March 31 2020 and September 30 2020. Immediately following the lockdown measures, the collection efficiency of banks dropped significantly, only to revive in the September quarter.


But the key concern across lenders, and one that stands in the way of both credit growth and better profitability, is the looming risk to asset quality in the coming months as the moratorium is lifted. Though the reported gross non-performing assets (GNPA) numbers of leading banks have seen slight moderation in the September quarter, much of it is owing to the Supreme Court order that mandated an asset classification standstill.

Take for instance, SBI, where the reported GNPA of ₹ 1.25-lakh crore in the July-September quarter was lower than the ₹ 1.3- lakh crore reported in April-June 2020.

According to the management, however, without the apex court order, GNPAs would stand at 1.4-lakh crore for the latest September quarter.

For ICICI Bank, too, while slippages in the September quarter were at ₹3,017 crore, another ₹ 1,410 crore worth of bad loans were not classified as NPAs.

HDFC Bank, while prudently increasing its provisions for the quarter, stated that its actual GNPAs could be at 1.37 per cent (compared with the reported numbers of 1.08 per cent) for the September quarter, if the Supreme Court order was not in place.

The coming quarters may test if banks have made adequate provisions.

While this may lead to a dent in profits, many bankers are unsure whether their capital buffers will be sufficient to withstand any spike.

Being conservative

NBFCs, also badly hit due to continued funding constraints, have gone slow on new lending and conserved capital, fearing the fallout of the pandemic on their loan books.They have focussed on streamlining their collection efficiencies instead.

Bajaj Finance, after posting a muted 1.1 per cent y-o-y increase in its AUM (assets under management) in the second quarter, lowered its growth guidance for the full year to 6-7 per cent, against 9-11 per cent. The management hinted at elevated levels of provisioning at ₹6,000-6,300 crore through FY21. The company has created provisions of about ₹3,200 crore in the first half of the year.

NBFCs operating in niche segments such as gold loans and retail housing loans, however, saw their loan books flourish. Muthoot Finance expects its gold loan AUM to grow by 15 per cent in FY2, higher than the 13 per cent growth in the first half. HDFC reported a 11.3 per cent growth in its AUM in the September quarter owing to healthy demand for individual housing loans and balance transfers. These may remain the bright spots in the NBFC space.

Aviation, Hospitality: Grounded

Aviation and hospitality, allied service sectors, are among the worst impacted in the country by the coronavirus crisis. The financial results of IndiGo Airlines and SpiceJet in the past two quarters reflect the intense pain and then the mild recovery in the aviation sector.

IndiGo’s consolidated loss in the June quarter — ₹2,844 crore — was its highest ever, while SpiceJet’s consolidated loss of ₹601 crore was among the largest it has posted so far. The June 2020 quarter bore the brunt of the lockdowns with suspension of all airline operations in the country until May 24.

Domestic flights resumed thereafter, but airlines were operating at a fraction of capacity with severe restrictions on capacity deployment. Also, passengers were largely wary. Fare caps and restrictive conditions imposed by many State governments, too, didn’t help.

The September quarter was somewhat better but only just — IndiGo posted a loss of ₹1,195 crore while SpiceJet posted a loss of ₹106 crore. The paring of losses on a sequential basis was thanks primarily to full-quarter operations.

The relaxation in domestic capacity deployment to 45 per cent and then 60 per cent of pre-Covid levels from about 33 per cent in the June quarter, helped Also, the resumption of some international flights under the ‘air-bubble’ agreements with some countries and repatriation flights under the Vande Bharat mission helped. But fare caps continued to play spoilsport.

Passenger numbers have increased from 30,000 on May 25 to 2.06 lakh on November 8. The recent increase in domestic capacity deployment to 70 per cent pre-Covid levels will also help.

But still truncated schedules, fare caps and fall in non-essential travel will continue hurting. So will perhaps a permanent fall in non-essential business travel. The FY21 bottom-line of the Indian aviation sector is likely to be deep in the red.

Cabin fever

The hospitality sector was also put on the mat by the pandemic. While demand for rooms and revenue was badly squeezed by the lockdown, hotels continued to incur the chunk of their fixed costs, and so, losses mounted.

Indian Hotels Company, for instance, suffered a consolidated loss of ₹280 crore in the June 2020 quarter and ₹230 crore in the September 2020 quarter. Lemon Tree Hotels’ loss in the June and September 2020 quarters were ₹42 crore and ₹37 crore respectively. Consultancy HVS ANAROCK estimates that the Indian hospitality sector faces revenue loss of about ₹ 90,000 crore in 2020. The silver lining is that with the unlocking of the economy, hotel occupancy has improved from 10 per cent in April 2020 to almost 26 per cent in September 2020, says HVS ANAROCK.

This is thanks primarily to domestic leisure travellers who have again started venturing out, mainly to nearby destinations for quick getaways. The wedding business is also lending some support. Business travel, though, still remains very weak.

Overall, 2020 is likely to be annus horribilis formuch of the sector with the struggle continuing further.

HVS ANAROCK estimates occupancy and average daily rate (ADR) to reach pre-Covid levels by 2022 and 2023, respectively, assuming a vaccine is in place by early 2021 and becomes widely available before the end of the year.