5/12/2020 Industry Outlook

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Outlook 209 industries covering all industrial and services sectors

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12 May 2020 1:00 PM, Chintamani Athalye

The worst hit industries

Prospects of turnaround distant
The lockdown imposed by the government to contain the spread of Covid19 hits the transport sector by
definition. As a result, all industries associated with transport are hit automatically. But, the impact
across the transport eco-system is staggered and graded.

The immediate impact of the Covid19-induced shutdown was on airlines. They took the most
immediate and the earliest hit as a result of the fear that the virus was turning into a global pandemic.
Airlines shut all domestic and international flights in mid-March before the national lockdown became
effective from March 25, 2020. Airlines are likely to remain shut for the longest time save for some
emergency services.

Airlines run a huge fixed cost and therefore they face the biggest survival challenge. Cash usually is
good to meet fixed costs for less than four months for airlines on average but, the lockdown for them
would be much longer. Even this average is skewed in favour of a couple of airlines. The rest are
extremely vulnerable to a liquidity crunch morphing into a solvency challenge.

It is unlikely that airlines will start operating commercial flights soon after the lockdown is lifted. Even
after they do start operating eventually, they are likely to face a severely compressed demand as people
would be very cautious in undertaking flights unless these are necessary.

We expect the airline business to shrink in All India Airport Traffic Statistics
(% change)
2020-21 to less than half its size in 2019- 30

20
20. We expect it to remain shut during the
10
first quarter and a good part of the second
0
quarter as well. Business could remain -10

highly curtailed in the third and fourth -20

quarters as well. -30

-40
The severe shrinking of the airlines
-50
business will have a cascading effect on -60
11-12 12-13 13-14 14-15 15-16 16-17 17-18 18-19 19-20 (E) 20-21 (F)
demand for aviation turbine fuel which, is Total passenger traffic Total cargo traffic

part of essential commodities. Besides, its

prolonged operational hiatus would drain the businesses and financial resilience of other transport
services, hotels and tourism well beyond the lockdown period as well. Road transport, hotels and
tourism, put together is a large and labour intensive industry.

Hotels and restaurants run on thin margins and carry high fixed costs. Cash and bank balances usually
cannot see them last more than three months without running into liquidity problems. Their ability to

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5/12/2020 Industry Outlook

withstand a prolonged lockdown is very limited. But, assuming India’s stringent lockdown stance seen
so far, they are likely to see a more prolonged shut down than the airlines.

We expect the medium and large hotels and restaurant companies to see an over 40 per cent
contraction in their sales in 2020-21 compared to their sales in 2019-20. The tourism industry could
see a shrinkage of 60 per cent.

Petro products-Consumption Reduced transport would have a direct

(% change)
20
impact on the demand for petroleum
10
refining products. This is a very large
0
industry as it accounts for 15-20 per cent
-10
of all the sales of non-finance companies.
-20
Automobile fuel is consumed even during
-30
the lockdown to transport essential
-40
commodities and personnel associated
-50
with essential services. Its consumption is
-60
11-12 12-13 13-14 14-15 15-16 16-17 17-18 18-19 19-20 20-21 (F) expected to limp back to some normalcy
ATF Motor Spirit High Speed Diesel Oil
in the green zones in May. Demand for
petrol and diesel from private transport vehicles could pick up in the second quarter as the lockdown is
lifted. But, demand for diesel is likely to remain somewhat subdued for longer as public transport could
remain contrained till the third quarter.

Consumption of aviation turbine fuel would remained highly constrained in 2020-21 but that of LPG is
expected to remain robust. The latter is expected to grow by 6-8 per cent.

We expect consumption of petroleum Petro products-Consumption

(% change)
products to decline y-o-y by about 30 per 15

cent in the first quarter of 2020-21. It is 10

expected to decline by 12.1 per cent during

5
fiscal 2020-21. While petroleum refining
0
companies have a tight cash-to-fixed-
assets ratio, they are unlikely to face any -5

liquidity problems because of their large -10

size and their ability to raise capital

-15
relatively easily. But, demand for these 11-12 12-13 13-14 14-15 15-16 16-17 17-18 18-19 19-20 20-21 (F)
LPG Petro-products: Consumption
would remain low for a long time. The
pandemic is not their only woe. Poor demand from a shrinking demand for automobiles is a standing
problem that will outlast the lockdown.

The lockdown is expected to deal a dreadful blow to the automobile and ancillaries industry which is
already in dire straits because of revised axle norms, high fuel prices, increase in third party insurance
premium payments, increase in prices due to BS-VI norms and NBFC-meltdown related liquidity crisis.

We expect sales of commercial vehicles to decline by around 9-12 per cent; passenger cars by 17.5 per
cent and two-wheelers by 10-12 per cent in 2019-20. Sales of automobile ancillaries are expected to
shrink by 15 per cent in 2020-21. We do not expect the industry to recover from its woes in the current
or even the next year.

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5/12/2020 Industry Outlook

Category-wise Sales of Automobiles The industry faced an inventory build-up

(% change)
25
before the lockdown hit it. The industry is
20
15 financially strong with enough cash and
10
bank balance to meet fixed costs for nearly
5
0 a year without raising any sales. In spite of
-5
its demand woes, it still has a decent net
-10
-15 profit margin of over 6 per cent and a
-20
-25
shining balance sheet.
-30
-35
While both, petroleum refining and
11-12 12-13 13-14 14-15 15-16 16-17 17-18 18-19 19-20 20-21 (F)
Commercial Vehicles Passenger Vehicles Two Wheelers automobile and ancillaries industries have
the financial wherewithal to withstand the
lockdown, their contraction in 2020-21 would hit the index of industrial production and therefore the
GDP very severely. The two together account for 17.8 per cent of IIP. The automobile industry’s
contraction has a direct and significant impact on employment as well.

The steep and prolonged fall in the automobile industry would impact the steel industry. As the
demand for flat steel from the automobile industry declines it would drag down pig iron production.
Demand for flat steel will also shrink because of a fall in demand for consumer durable goods.
Refrigerators, air-conditioners and other discretionary consumer durable purchases are expected to see
a sharp fall in the wake of income losses during the lockdown.

A bigger challenge for the steel industry is the expected melt-down in the real-estate and construction
industry. This industry accounts for over 60 per cent of steel demand.

We expect steel production and Finished Steel: Consumption

(Y-o-Y % change)
consumption to fall by around 12 per cent 10
8
in 2020-21. This would be the first time in 6

at least 13 years that steel consumption 4

2
would witness a fall, and a sharp one at 0

that. The industry does not have the -2

-4
luxury of fat cash and bank balances. It is -6

significantly geared with a vulnerable -8

-10
interest cover. Therefore, the lockdown -12

raises many red flags from the steel -14

11-12 12-13 13-14 14-15 15-16 16-17 17-18 18-19 19-20 20-21 (F)
industry.

Real estate and construction sector has had a liquidity problem till recently. Now, it has a labour
problem and, it will face a demand problem as well. If labour is fearful of lockdowns the industry may
face a short-term crisis. If demand is restricted, it may not see adequate funding. Stalled projects are
likely to lock-in capital and raise NPAs.

While the uncertainties in the construction industry are too many and too complex, it is likely that the
industry would see a curtailment of business that could well last through all four quarters of 2020-21.

The difficulties of the construction industry are also a reflection of the investments problem the
economy faces. Capex is stalled and the situation will only get worse. Beyond the construction industry
this is expected to impact the cement and other construction material industries such as ceramics,
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5/12/2020 Industry Outlook

granite, paints, etc. and also the machinery industries. Both sectors are comfortable on their cash
position compared to fixed costs. But, that is only a small consolation since the prospects of a
turnaround in these industries is distant; possibly beyond 2020-21.

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