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Retail Equity Research

Update - Corona Impact on India Equity Market

SENSEX : 34,103 NIFTY : 9,955

16th March, 2020

The financial & economic effect has been higher than forecasted earlier… The economic effect of Covid-19 virus spread to India was anticipated to be moderate, assuming that the epidemic would be majorly limited to China. Today, Covid-19 seems to be more or less fully contained in China, with the new cases falling below 20 per day. But outside China, the measures to identify and contain the virus were not very stringent, which led to increased cases in Europe, Iran, South Korea and USA, as the worst affected. Now this spread has led to unprecedented actions being taken, following the Chinese model of containing the virus, leading to a complete/partial lockdown in many countries. This is having a ripple effect on the market with varied sector wise implications. Indian market is down 20% (as on 14th March 2020) from the peak, aggravated by a huge drop in oil prices and the banking crisis. At the same time, it is creating opportunity for the long-term, to grasp quality stocks at discounts. Macroeconomic Impact The economy was grappling with a growth rate of 5 percent, lowest in the last 10 years, and this external shock has further worsened the situation. The supply chain disruption caused by the outbreak of viruses can negatively affect production in the domestic industries. This, in turn, can have spill over effects on employment, consumption, and investment, pulling down the overall growth rate. Similarly, the export sector will also face the heat due to the unavailability of raw materials, slowing global demand, shipment and travel restrictions. It would be difficult for the economy to achieve the growth rate forecasted by the Economic Survey at 6% - 6.5% for FY21, and the target would likely be revised downwards. A major part of the impact will be during H1CY20 while a benefit is the drop in oil prices, although this could be slightly offset by the weakening rupee. The spread of COVID-19 across the globe has created volatility in the currency market, with the Indian rupee being one of the worst performers. On a positive note, India has forex reserves worth $476 billion, giving adequate space for the Central Bank to intervene in the currency market.

Let us have a look at the impact of Covid-19 on the economy and the various sectors.

During this period, the business impact to sectors will vary from very high to minimum while a stock will be impacted as per its correlation with the equity market. Fundamentally, the degree of impact on the Sector and the corresponding stock will be based on its export and import dependence. The least impacted will be those which are fully domestic oriented. This time, given the restrictions and bans, Tourism, Travelling, Entertainment and Media business will also be impacted while least impact is expected for FMCG. In overall, these businesses are expected to reverse to normalcy in the next 2-3months and benefits will emerge from the drop in oil prices and mixed benefits from the spurt in chemical prices. Valuations are also likely to reverse to normal levels.

Nifty50 best

performing

Stocks

Return(%)*

Bharti Airtel Ltd 4.8

Hindustan Unilever Ltd 1.2

Nestle India Ltd 0.8

Asian Paints Ltd -1.2

Dr Reddy's Laboratories

Ltd -2.1

Bajaj Finance Ltd -5.7

Titan Co Ltd -7.1

Bharti Infratel Ltd -8.3

Britannia Industries Ltd -11

Cipla Ltd -12.1

Nifty50 worst

performing

Stocks

Return(%)*

Tata Motors Ltd -54.2

Vedanta Ltd -49.1

Oil & Natural Gas Corp

Ltd -47.3

IndusInd Bank Ltd -45.8

Hindalco Industries Ltd -39.9

GAIL India Ltd -35.0

Tata Steel Ltd -34.5

ITC Ltd -33.3

Zee Entertainment

Enterprises -32.2

UPL Ltd -29.6

*From 14th Jan to 13th March2020 (Closing Basis)

Nifty50 performance from 14th Jan 2020

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Chemicals – Near-term impact but spurt in international prices to benefit

India chemical industry sources raw material from China, but most companies have adequate inventory to cater to demand in the near-term (at least for the current quarter) and with gradual resumption of work in Chinese factories, supply issues are expected to be resolved. Additionally, crude derivatives as raw material for chemical companies will be positive for the gross margins given drop in oil prices. Domestic specialty and Agro-chemicals players with strong supply chains and backward integration are likely to benefit.

Auto – Ancillaries– Impacted due to high exposure in China, US and Europe

Impacted by supply chain issues, the currency depreciation is also likely to increase the raw material cost, as most of the companies have 10-15% import content. The industry is reeling under the pressure of lower sales due to increase in vehicle cost (owing to BS-VI transition) and competition in the last one year. The industry is looking at the impending scrappage policy which is due to be announced by the government in the near future.

Banking and Finance – Fall in global interest yield is the concern

Fall in international bond yields indicates high increase in global financial & economic risk, which could be the highest concern for Indian banks, though Other Income will spike for banks due to treasury gains. Apart from the increased systematic risk, PSU banks are currently undergoing structural change with the planned mergers, while stressed asset concerns persist for Banks and NBFCs. The recent Yes Bank issue has highlighted operational risk of small private banks. Considering the Gold prices, NBFCs with gold as collateral are much better placed than their peers.

FMCG & Consumer Durables – Limited impact

Although there will be a marginal fall in general consumption and demand slowdown, the sharp decline in crude will benefit the industry with reduction in packaging and transportation costs. Companies have seen limited impact on account of supply chain disruptions because of inventory build-up ahead of season. However, prolonged disruption can have an impact and associated cost increases. We can expect stable growth in business while high valuation will be a deterrent to perform in the short-term.

Metal – Demand and Price Pressures, but Domestic opportunity intact

Demand is expected to be downward due to lower global growth which may affect pricing power of metal stocks. Currently, imports from China are at around USD 5,500 million while exports are below USD 800 million, which signifies a huge opportunity for Indian players to cater to domestic demand. However, the virus spread along with Macro headwinds could affect domestic steel consumption and add volatility to steel prices.

Sectors

Pharma – Mixed gains and losses

Most pharma companies are export oriented with high exposure to US and Europe. Their economies are expected to slow down with precautionary measures on trade, which could have a cascading effect. At the same time prices of raw materials like APIs have increased due to cut in availability from China which is the largest source, impacting profitability of the sector. On a positive note, these raw materials are derivatives of crude oil and the current huge drop in oil prices will benefit them in the medium-term as businesses normalize. Supply bottlenecks of APIs are expected to be resolved as soon as Chinese factories resume production.

Oil & Gas – Positive for refiners while negative for explorers

The demand outlook has weakened which will reduce consumption from Industries and Retail. The crude oil price correction has a mixed impact on oil & gas companies. Upstream companies will see revenues negatively impacted on account of lower oil prices while downstream companies will benefit from lower costs of refining and hence Gross Refining Margins and marketing margins will improve.

Entertainment, Aviation and Tourism – Negative due to restriction on public gathering

Fear of the virus spread and Restrictions placed will impact Movie Box Office collections, Movie Distribution Income, Advertisement Income for Movie houses and Media companies and also impact sectors like Amusement Parks etc. Travel restrictions are likely to have material impact in near term due to flight cancelations leading to lower utilizations and other associated costs offsetting any gains in fuel input costs. The closure of borders and restrictions on travel will have an impact on Tourism and its allied sectors.

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Summary

The stock markets, as measured by the benchmark indices have fallen by around 20% this year, and for once this has been in sync with global markets as a whole. This heightened volatility and the general Risk-off attitude in the Global markets is due to the uncertainty and fear created by Covid-19 and the unprecedented actions of the governments to contain it. Investors would do well to note that the markets have historically faced such situations and more importantly recovered from it, albeit over varying time periods. If it was a Banking crisis in 2008, now it is due to the Coronavirus spread and the, still as yet unascertained, damage to the global economy and also to India specially, coming on the back of an already slow economic growth of 4.7% in Q3FY20. The difference in this market scenario is that there is a definite recovery point for which investors can look out for. A slowing growth rate in new infections around the world, or especially in the developed nations could be a trigger for the market recovery. As per illustration, Chinese infections have dropped off while the infection rate in other countries seems to following the same trajectory. We will reach a point when that rate starts tapering off, and that would be a good indication that the virus threat is being controlled. The sharpness of the recovery would depend on how fast the threat recedes and how fast the global economy is expected to get back on track. Long term investors would do well to buy into the extreme bouts of volatility that we may witness and ensure to accumulate Quality stocks during this period.

Source: Geojit Research, Bloomberg

Paint Industry – Marginally positive

Business is largely domestic oriented and on account of the sharp fall in crude oil prices, the cost of the key raw materials dampened which would enable significant improvement in margins for paint companies. Further, companies are likely to pass the benefit to customers to set the brush for a revival in demand. The valuation of the sector is on the higher side.

Aquaculture- Negative on low demand and transport restrictions

The export-oriented sector will see an impact on volumes and prices due to lower demand (partially offset by INR depreciation). Mounting complications in logistics & port clearances can also have an impact on the sector.

Textile & Apparel – Affected due to high dependence on China

Being export oriented and also with high exports exposure to China, demand outlook remains subdued. The companies could not emerge as an alternate destination for the global textile industry because of dependence on inputs from China like zippers, buttons etc. Withdrawals of key incentive schemes like Merchandise Export from India Scheme, indicates lower earnings outlook. Apparel business in India will benefit in the long-term as client’s interest to shift business from China to other emerging countries like India.

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27th December 2018 General Disclosures and Disclaimers

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27th December 2018

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