The government has extended the coronavirus lockdown in the country beyond May 4 for another two weeks, allowing considerable relaxations in places considered less dangerous. The coronavirus outbreak has disrupted the country, with many businesses shut and migrant workers stranded in hardship. As India moves to open up the country, investors will look at sectors that have been resilient. Indian telecom is reporting a spike in data usage — good news for a sector that was in crisis until recently. FMCG is reporting demand increasing as people order online. Puneet Wadhwa charts more sectors expected to do well in the next few months.
Puneet Wadhwa, Business Standard
The coronavirus pandemic hit India at a time when the economy was slowing down due to the aftereffects of demonetisation, goods and services tax (GST) rollout, crisis in the non-bank financial companies (NBFCs), and other factors.
Analysts say the situation has the potential to impair the purchasing power and dent demand. The pandemic will not only hit purses, but also the psychology of a generation and how it spends. The impact is already visible across geographies and financial markets, with experts slashing their growth projections as measured by gross domestic product (GDP).
Goldman Sachs, for instance, expects the global economy to sink into recession in 2020, as the pandemic takes the GDP to a negative 1.8 per cent. The latest forecast is a 5 percentage point (ppt) downward revision since early this year, and around 3 ppt lower than its forecast on March 22.
The global research house has lowered India’s real GDP forecast to 1.6 per cent for the financial year 2020-21 (FY21), from 3.3 per cent earlier. This, however, is still higher than the United States, which it now sees contracting to -6.2 per cent in 2020 (from -3.7 per cent earlier).
However, every time markets undergo massive corrections, new leaders drive the next wave. Market movement in the 1990s, for instance, was led first led by consumption in the post-liberalisation era, followed by dotcoms, then infrastructure and then banking, financial services and insurance (BFSI).
“While it would be premature to comment at this point of time on which sectors are likely to emerge winners from Covid-19, we believe some of very high PE multiple sectors will take a slight breather. The next wave will see increasing participation from sectors like telecom, healthcare, chemicals and select service utilities,” said Amnish Aggarwal, head of research at Prabhudas Lilladher, referring to the disease caused by the coronavirus.
“The partial resumption of activity from April 20 merits tracking. Chemicals’ utilisation was at 50 per cent even during the lockdown, and should ramp up rapidly. Other sectors where we expect a partial resumption are cement, building materials and packaged foods. However, information technology (IT) companies are less likely to utilise the relaxation to have up to 50 per cent employees working from office premises,” said Dipojjal Saha, an analyst at UBS Securities, referring the government allowing some businesses to resume ina a national lockdown to contain the pandemic.
Here are five sectors that analysts expect to do well in the next few months.
Telecom has been resilient in the lockdown in terms of both data and voice usage, being comparatively undisturbed by global factors.
“Indian telecom is entering a phase of tariff discipline which, along with rising data penetration, will drive 44 per cent expansion in sector revenues to $28 billion. Furthermore, sector is likely to consolidate into a duopoly with Bharti Airtel favourably placed to capture 35 per cent share by financial year 2022-23 (FY23). Consolidation will also drive a fall in spectrum prices, benefiting the sector,” said analysts at Jefferies in a recent report.
The Covid-19 outbreak is a positive for Indian pharma, most analysts say. Drugs on clinical trials if successful can benefit Indian pharmaceuticals such as Cipla, Ipca Labs, Cadila, Laurus Labs and Alembic. Cadila is working with other institutions to develop vaccines to immunize against the virus.
The abbreviated new drug application (ANDA) pipeline that is pending approval with the US FDA remains healthy. The slowdown in approvals is partly a result of the disruption caused by the coronavirus in administration activities as well as product-specific queries. That said, there have been quicker approvals/exemptions for products recommended in the care of Covid-19 or respiratory diseases, reports suggest. Favourable macro and government policies are likely to drive strong growth in the API and the CRAMS businesses as pharma companies look to diversifying their raw material sources, analysts say.
Pharmaceutical manufacturing is exempt from the lockdown, but labour shortage, lack of clarity over transporting ingredients like packing material and social distancing have hurt production. These could be the near-term headwinds for the sector.
The sector was reeling in the slowdown when Covid-19 created another level of uncertainty. The health scare started as a back-end supply chain worry for some players, but it has now become a demand concern for the industry. Worries are emerging on the potential impact of lock-down on income levels and consumer spending. The coronavirus crisis may hurt revenues, but analysts do not see a significant downside yet for operating margins estimates in FY21.
This is mainly because of the cost focus that the industry will have as it navigates through the crisis. As launches take a backseat, the industry would be able to cut back on advertising spends. For some investors, the sector will remain a safe haven play in uncertain times. “Consumer staple industry is relatively better placed compared with several other sectors in India given the defensive nature of consumption,” said analysts at Jefferies. E-commerce has benefited because of the lockdown. Once the lockdown gets over, most analysts expect online shopping to revive first, followed by food delivery and then local travel.
Covid-19 is a new catalyst for the chemicals sector, as countries ask their companies to move supply chains out of China to diversify risk. As a result, Indian chemicals players can benefit from the specialty chemicals market expanding globally alongside manufacturing shifts from China. Analysts at Edelweiss Research suggested chemicals companies may do better in the lockdown, given their diversified base of user industries, resilient demand from sectors, such as hygiene and personal care, agrochemicals, and pharmaceuticals. What should aid their performance is the Indian rupee’s depreciation and the sharp correction in the price of crude oil, derivatives of which are key raw materials. Companies investing in chemistry platforms, process engineering; manufacturing infrastructure and accreditations, and superior client engagement will stand to gain over the long term, analysts say.
Oil marketing companies
A sharp fall in the crude oil prices may not be a good news for domestic oil producers, such as state-owned ONGC, Oil India or private companies like Vedanta and Reliance Industries Ltd. (RIL). Oil marketing companies (OMCs) may gain though if prices sustain at lower levels. Oil supplies exceeding demand has led to a storage crunch globally and it was the key reason for WTI crude oil May futures tumbling into negative zone.
Refiners like RIL are witnessing pressure on their refining segment profits because of the demand slump, but the fall in oil prices also means inventory losses will pull down refining margins further, say analysts. Facebook picking up nearly 10 per cent stake in RIL, however, could pave the way for the Indian company becoming debt-free by March 2020.
State-run OMCs (Hindustan Petroleum, Bharat Petroleum and Indian Oil), too, will feel the heat on refining margins and likely report inventory losses. They would also benefit from the positive trend in marketing margins. Cheaper oil benefits OMCs, as they need to pay less for imports, and hence, lower their working capital requirements.
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