Second COVID-19 surge will delay earnings recovery for Indian companies : Moody's
India's sharp rise in infections will disrupt earnings recovery of companies recorded over the past six months, a research report by Moody's Investors Service has said.
A prolonged and wider lockdown will have a more severe effect on earnings recovery
India's largely regional and less stringent lockdowns amid the second wave of coronavirus cases so far have had a limited impact on economic activity.
If infections fail to decline to more manageable levels, however, lockdowns may be prolonged and widen, which will have a more severe effect on companies' earnings recovery, according to the new report.
"Movement restrictions and weaker consumer sentiment amid the second virus wave will hit housing and automobile sales as well as transportation-fuel demand temporarily. Still, rising consumer preference for remote working and personal mobility solutions will drive long-term demand for bigger homes and entry-level cars," said Sweta Patodia, a Moody's Analyst.
"Demand for IT and telecommunication services will remain strong despite our expectation of a slowdown in economic activity over the next few months."
"Strong global demand could boost exports from Indian steel-makers given relatively weaker demand from automotive and white-goods manufacturing in the current quarter. Exports are therefore an attractive opportunity because domestic steel prices are lower than international prices," said Kaustubh Chaubal, a Moody's Vice President and Senior Credit Officer.
Meanwhile, Tata Steel Ltd. (Ba2 stable) and JSW Steel Limited (Ba2 stable) have diverted part of their capacity in oxygen production toward medical use amid shortages, but their large oxygen-producing plants will limit the impact on steel production.
At the same time, a slowdown in construction activity will cut cement demand. Cement consumption growth in the fiscal year ending March 2022 may be lower than Moody's previous forecast of 10%-12% growth.
Still, high government infrastructure spending and supportive housing demand underpin the sector's fundamentals and support UltraTech Cement Limited's (Baa3 negative) earnings, the report said.
Refinancing risk will be manageable for most issuers given their strong access to funding markets because of their strong balance sheets or status as government owned/linked companies. However, refinancing could be a problem for companies with weaker balance sheets, Moody's said.
The government has not declared loan moratoriums, which supported liquidity in 2020, so far in the current year. This could further pressure liquidity for weaker entities, the report said.