India Inc turns slightly cautious on demand revival

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With the rising raw material prices and the onset of the second wave in the June quarter, India Inc has turned slightly cautious on demand revival. However, managements look confident on the recovery post the transitory impact of the second wave.

Earlier, the March quarter corporate earnings season maintained the momentum from the preceding quarter, as strong demand and a subdued base benefitted corporate India’s earnings.

With an upgrade to a downgrade ratio of 1:2, brokerage Motilal Oswal believes that the cautious outlook and impact of rising raw material prices on companies have raised earnings to downgrade risks.

“Around 39% of the companies in our coverage universe beat Q4FY21 estimates, while 33% reported below estimate results. The upgrades in metal companies compensated for downgrades in other sectors, resulting in an upgrade in Nifty EPS,” Motilal Oswal Financial Services said.

Sectorwise updates

Banking: Most banks’ management commentaries reported a sequential uptick in loan growth, led by healthy trends in retail, with many segments such as gold loans and home loans surpassing pre-Covid levels. On the other hand, deposit growth remained strong, led by a high mix of CASA deposits. With the advent of the second Covid wave and subsequent lockdowns in various key states, collection efficiency moderated in April-May’21. Some banks reported a 4-5% drop in collections against March 2021. Overall, banks remain watchful of business growth and the asset quality outlook in the near term

Automobile: In the consumer sector, the second wave and subsequent lockdowns have disrupted the demand momentum across the country. On the other hand, demand for autos has been impacted due to localised lockdowns in Q1FY22 as most of the dealers have been closed.

“OEMs have brought forward their annual maintenance shutdowns due to lockdown and supply-side issues, such as the unavailability of industrial oxygen and chip shortage. Managements are optimistic about pent-up demand post the lockdowns. While commodity cost inflation impacted gross margins in 4QFY21, this was partially offset by price hikes taken by OEMs during the quarter.

Retail: Quarterly commentaries by the retail sector showed that it came to a standstill in March 2021 as lockdowns across most states or territories led to store closures. However, footfall and sales were seen picking up swiftly over January-February 2021 with a recovery in retail spending. Retailers expect Q1FY22 to be another lost quarter of sales, while the opening up of stores in Q2 may lead to sales recovery by Q3/Q4FY22.

“Retailers expect slower recovery post the second Covid wave as consumer spending is impacted further. An increase in raw material prices would impact pricing and margins, coupled with demand decline for apparel,” Motilal Oswal Financial Services said.

Capital Goods: On the other hand, management commentaries for the capital goods sector indicated most of the companies are now operating with almost 60-80% labour strength and efficiency (against Feb-Mar 2021) amid the onset of the second Covid wave. Motilal Oswal Financial Services highlighted that the L&T management indicated the order pipeline is up YoY, implying a positive outlook. The Cummins management was cautious on the export market while stating that the efficiency of its own operations has declined to 50% (from 70% at end-Mar’21). In consumer electrical, the Havells and Crompton managements indicated disruption in the demand momentum since the second half of April 21. Additionally, they stated further price increases would be needed to entirely cover the commodity cost inflation.

Media: Economic revival, aided by an increase in advertising spends by corporates, resulted in a recovery in advertisement revenues for broadcasters in Jan-Feb’21. However, recovery was impacted by the second Covid wave in March. Sun TV expects double-digit revenue growth in the subscription segment in the coming year, while ad revenues are expected to pick up from Q2FY22. Furthermore, the company plans to invest a total of Rs 1000-1200 crore in movie production over the next two years, in addition to some shows being lined up for release. The Zee Entertainment management expects double-digit revenue growth in FY22 (over FY20) and an EBITDA margin of over 25%. PVR has decided to put capex on hold at present.