The above report is a must read. The numbers are staggering. It is an honest assessment of the situation at hand and it further extends the views I have held in the post above:
Summary of the report:
This report, in its percentage table, is expecting twice the correction in most sectors if the lockdown is continued.
In BFSI, sticking with leaders (better funding due to provisioning) for investment is recommended. The author probably sees a lot of pain.
Micro lending and Insurance are worst hit. Worst case PAT change for Max Financials is -41%
In both scenarios, Consumer discretionary stocks are taking a bad hit. High PE stocks like Jubilant are in for a deep correction, which was expected.
The Energy sector too is seeing a slash of 57%. This leads to an important conclusion: Nifty 50 leaders are
HDFC Bank @ 11%
Reliance @ 10%
HDFC @ 8%
Comprises around 30%, as per this report, are expected to go in deep red. This might make Nifty reach 6000 if lockdown is extended, which is going in the direction that Mr.D hinted.
Short Term: In short term, the lock down and global mess going to affect almost every industry.
Medium Term: Companies across the globe will focus on revival plan and change their business model to avoid such an impact in future.
If we succeed in finding what has caused the impact on xyz nation/industry/company, we should be able to guess the possible actions by the affected nations, sectors and companies.
What caused the impact?
Few general causes I could think of
Over dependence on outsourcing.
Over depending a single geographic location for raw materials.
What could be the action?
I believe this will force companies to go for a more distributed model in terms of procurement (raw materials) and operational (IT / Infra / Workforce) dependencies.
What will be second order impact that will be created by these actions?
All b2b sector leaders will lose a pie of their share to others.
China will lose its pie in manufacturing sector.
India will lose its pie in service sector.
Just putting together my mind map. If makes sense please let me know will try to find answers for any industry or a global leader who has been impacted a lot by this COVID
I don’t think there is going to be a very large disruption if your time frame is 5-10 years. Yes travel and tourism is going to be very hurt and leveraged players there are going to go bust. Yes, working remotely is going to find favor where it is possible. People’s concern with hygiene is going to go up in the short-term. In the long-term, perhaps not so much. We weigh cost-benefits on a rolling basis and not absolute basis. In other words, we will be hygienic, when necessary.
Coming to govt. money and migrant labour - Let’s take a step back and see what macro changes are somewhat long-lasting from this crisis
a. Crude price drop may be here to stay for awhile. This might be because Saudi/Opec and Russia were in a iterated long-term prisoner’s dilemma where currently both players have played the ‘Defect’ card. This takes awhile to get back to normal and for the co-operation to come back (using constructs from Game Theory) which could mean lower prices for sometime (Demand wasn’t holding up the price lately, as much as cartelisation was)
b. (a) leads to this naturally. This is a bonanza for us. We roughly import 3 lakh Cr and export 2 lakh Cr, leaving us a trade defict of 1 lakh Cr roughly. Of the 3 lakh Cr. imports, about 33% are crude and related products. A 50% cut in its price means about 50k Cr saved for us - per month. (This is still first-order thinking - what happens if our exports shrink due to drop in world demand and a fallout from globalization to localisation)
c. Lets get to fiscal deficit from trade deficit. The govt. has increased excise duty smartly and has not passed on benefits. This leaves a lot of space for the govt. to maneuver. It also has a supportive central bank and a crisis - All giving it the license to go all out to spend.
So govt. has a lot of money to spend and the license to spend and there is a lot of labour available and energy from crude available for cheap. This might mean a kickoff of large infra projects (Can only be played via commercial banks, zero debt infra ancillaries if you are conservative)
Then there is the low interest rates, low inflation and possible high growth (Goldilocks economy) in the horizon fueled by all the above. It may not be tomorrow or next week but could play out after a year or two. This is the natural and high-probability outcome of a big crisis. This is the only time I am willing to make an exception to buy financials because that’s the only time they are available at realistic valuations (sans fiction, multiplied by fiction).
Recovery is not around the corner but its inevitable from a 2 year perspective. Market has rushed to factor in the near-term disruptions but may not have factored in the time required for recovery (the 1-2 years), now this may never get factored in, if the market sees a recovery as inevitable and is willing to wait. World is flush with cash in a near zero interest rate environment and will take any growth it can. All we have to do is not screw up poorly.
a) Debt which was anyways a taboo will be considered even more riskier. Raising debt will be riskier, investors perception of debt companies will be riskier. Even manageable levels of debt will be hated. Demonetization followed by ILFS and other bad debt followed by Covid19 have all created significant liquidity issues in the market. AAA rated corporate debt (including NBFC debt) and Bank debt will remain significantly cheaper compared to sovereign. All of this mean that financials will get derated and may take some time to come back to their old glory.
b) Covid19 will take precedence, followed by Agriculture. This will result in a significant fund flow to the social sector and capital formation will take a back seat. India is going through one of the worst unemployment crisis and this will be accentuated significantly because of the job losses due to Covid19. Government on its part can look to alternatives like universal income further reducing scope for any infra push. Sectors like cement, infra, cap goods and most India specific sectors in infra will face significant demand headwinds.
c) The current scenario of a loose fiscal with -ve growth, a loose monetary policy will be inflationary in nature. We are most likely heading into a stagflation kind of scenario. The current lowering of interest rates in my opinion is a temporary relief with inflation rising monetary tightening is bound to happen. This will add to debt woes mentioned above.
d) Healthcare sector post the crisis could see significant boost by government mainly for capacity augmentation. This could mean special grants/subsidies/tax holidays to the private players in hospitals. One can already see the +ve approach in pharma API and other segments.
e) Higher duties on fuel (non inflationary as long as prices are down), higher import duties on discretionary, higher duties on alcohol and tobacco, higher GST on discretionary will be some of the easier sources for tax mop up.
f) The crisis has brought fwd the faultlines in international relations. The west is worst effected. Looking at how various nation states have acted specifically US and EU nations, Globalization will be under attack. It is almost clear in times of crisis every nation is left to fend for itself. The EU project and Euro itself can be under tremendous stress as nationalism start getting more and more traction. This could also mean that a lot of smaller/weaker nations will look to China to help them out both in the crisis and post crisis to re build the nation.
Beyond the short term: Short term there are no marks for guessing, a lot has already been priced in, there can still be some outliers beyond the usual like commodities where supply side is getting far more severly disturbed than the demand side things to track here are ferro alloys. I also see agro chem being one of the least impacted sectors. More important now is to look beyond the short term and see when a new base sets in for various industries. Domestic consumption mainly auto should be the next (also evident from the post GFC data) and that gets followed by other segments.
As I have mentioned above there are too many uncertainities right now, for example if state and central govt. clearing dues if RBI provides extended line of credit can be a game changer for infra sector. Oil normalization ($50) up can impact inflation, fiscal deficit and CAD. One must be nimble and tread cautiously. anything beyond 6 months post Covid19 is unchartered territory (unless you are in FMCG…).
Most of these are at their median PEs, so is Nifty.
I think Nifty starts becoming cheap below 17PE, around 7540, which is near about the current swing low.
Most of the mentioned stocks were the darlings of the market as they had growth, Pedigree and we’re low debt. Now with no visibility of growth the market has Re rated them, and yet look expensive, because one wonders how to pay 40PE for 5% growth (Page). Or 60 PE for a life insurance business with Covid in the background.
Plus, the EPS has not changed. It will take couple of quarters for a truer PE to show in print.
Choices are tough. One wonders when will the growth return, will history repeat. Truth is, it won’t for most.
Edit 1: To get a proper view, we must reduce the EPS before hand and then consider PE. For ex. currently nifty EPS is 443. Reducing it to 400, and calculating 15PE, Nifty comes to 6000. That should be the true low.
I don’t think a lot of disruption will have happen on a longer time frame. All most all sector will have short term pain but travel , tourism will hit hard for a longer duration.I think companies which caters to branded segment will take a hit at least for 2 years as consumption spending will be reduced and focus will be on saving,but it will be short term change in mindset. If a major job crisis happens ,then the pain can sustain for longer time.
Companies like bajaj finance, Titan, Starbucks, sbi card and other companies catering to branded segment will be hurt the most and accordingly we have to value the company now .I believe they will not sustain the high valuation with a 2 year view.
Even if corona situation improves still govt will advise to maintain social distancing, so impact will be on irctc, pvr , inox & wonderla and longer period of lock down can hurt most.
Post COVID-19, we can one see significant permanent change in the addiction towards digital content and social media. All the OTT platform will be benefited the most. I don’t see any OTT Platform companies listed in India. So CDN (content delivery network) provider can be good proxy play. Tata communication (TCL) is one of the service provider who has seen huge growth in CDN network.
India has been a darling of sovereign funds for some time now driven by it’s growth potential, positive demographics and continued economic development prospects. There are many articles which covered this. Below link is one of those.
But now the tables have started to turn, forced by unplanned expense due to Corona some countries are looking to liquidate their assets from sovereign funds. Norway is one such
Could we see more of this in coming days ? Could this be a second order effect which will impact the markets further ?
Thanks for the nice articulation on several issues.
I have a different take on this point specifically. With economy grinding to a halt, and likely low to negative growth post lockdown lift off and delayed re-starts, its unlikely the government will have much money to spare even with the Oil bonanza. All the money that it can spare, will go towards social subsidies, and these are going to continue for a while. Govt has (had) no money to pay GST share to states, had no money (nothing released yet) for various intervention schemes already announced like the Real Estate last mile support fund (announced last Oct/Nov?), had not released for other initiatives announced later too (will check back and list), forget about new badly needed interventions for MSMEs …need to step away for a bit…
So infra spending, that too in a big way looks highly unlikely. Though its part of Govt’s main agenda, and if they manage that, will be a big plus in settling the migrant labour back.
I think the view on oil is that storage capacity is now being overwhelmed and people are opting to dispose off inventory at firesale prices or shut down production - this will eventually lead to a sharp snapback of prices and a surge in prices - probably more near term than later. Rupee depreciation is another factor.
Considering the chances of catching infection from others, after lock-downs are lifted, we might see that people want to avoid crowds.
Looking at the auto sector, the trend towards public transportation and ride sharing should take a hit. People will move towards purchasing own vehicles. Could be positive for two wheeler & car sales.
Journeys by crowded trains could be replaced by long drives in private vehicles, which may increase usage of tyres.
Supermarkets could be shunned upon and local kirana could make a comeback with home deliveries.
Theatres, sports and other events could see lower crowds and home entertainment would get big. TV sales could see good pick-up.
You are right on the supply demand side and on the global pricing! But it is only a opportunity for the Indian Govt to fill in the gap of fiscal deficit. Every non-BJP state have complains about GST Dues to be settled! The huge disinvestments plans are not able to fill the coffers, so I doubt too that this will have such a huge effect considering the huge list of policies that are cash strapped already…on top one expects the Govt to announce more measure for the relief of industry at-least MSMEs otherwise millions of jobs will be lost! So it is just a boon in disguise but not answer to the cash crunch
I have a different take on Pharma sector. I believe that with rise of protectionism (" BUY AMERICAN" slogans, anger among American public, there is a good chance that they will insist on local pharma manufacturing. The options that Indian manufacturers will have:
Setup additional capacities to cater to local manufacturing
Exit the US pharma market altogether
So, I would stick to stocks with domestic focus to avoid this uncertainty
I think there is a lot of recency bias factored into some of the comments above. For example, if one believes infrastructure and real estate sector has high probability of going down because of migration of labour and less spending of govt. etc. then I fail to see how same person can consider a company like asian paints as a safer bet ? Same way, if one believes financials will be hit severely because many people will find loan repayment to be a challenge, then I fail to see how same person can consider fmcg sector as a safer bet ? A lot of growth in consumption sector has occured because of rise in disposable income of people. Essentials, obviously will always be consumed, but less disposable income would mean less consumption than before, right ?
What I believe is there are many possibilities right now depending upon how India deals with Covid-19. There are 2 scenarios-
Scenario 1- The lockdown is lifted after 14th april. In this case, like Phreak suggested I don’t see too much of change in the overall economic landscape, especially for the long term. I believe there will a minor impact on NBFCs and other financials, but even these sectors and the rest of economy will get back, atleast to pre Covid-19 days. However, export oriented companies could be impacted depending upon what they export and to which countries. For example, it seems EU and US have a hard time ahead and are going to be more severely affected by the crisis.
Scenario 2- The lockdown is extended for another 1 month (or 2 in the worst case). In this case, there will be severe structural changes and I am afraid the economy will be hit very hard. Because of less disposable income, we will see de-growth in most of the sectors be it fmcg, fmeg, automobiles, entertainment, travel and leisure etc. Not to mention the lofty valuations of some of these companies, some people who are still buying these are in for a rude shock if scenario 2 does play out.
So how best to play in either of the scenarios ? Atleast, for pharmaceuticals, I think there is a clear consensus. Fmcg products, even though will be impacted if scenario 2 plays out but they will still be in good demand. Fmcg companies however, their high valuations demand growth, so they are ruled out from my point of view. However there can be a lot of proxy plays. One clear cut example is the chemical sector companies. Here are my reasons-
Most of the products of these chemical companies are directly used in fmcg, pharma, food and agro-chem sector. Speciality chemicals were projected to grow at 12% anyways by FICCI.
Undervaluation.
Lesser imports from China.
Lastly, the recent fall in crude oil prices are a big positive for these companies.
Disc.- 20% of my porfolio as of now is in chemicals. I am looking for more hidden gems in this space though.
As more people return to farming and the impending shortage of food and shortage of labour for ancillary industries, will companies that make pesticides and fertilisers outperform in the short to medium run
Companies that come to mind are upl, pi industries, Bharat rasayan ?
There might be more
@Donald bhai, I think it is easier for a single person to do this kind of second order thinking in his particular field or in his life. Honestly, I can’t imagine the next level impacts of migrant labor taking time to come back and start working on infra projects.
I’m trying to put some trends which I think can play out based on “my” lifestyle and “my” profession. I put “my” in quotes as everyone should realize that this is a highly-biased post and that trend may not actually move the needle for businesses. Will cater to this bias and impact in further posts based on how discussions evolve. If everyone from different professions come up such trend list, we can aggregate and draw some conclusions.
Firstly, I work in a Softwar-ish Engineering role and so below is list of trends which can materialize from WFH culture introduced in IT companies.
Two factors playing out for WFH culture to gain momentum:
Software companies right now don’t have a choice but to explore this option during current times. This will force them sharpen their WFH tools and companies might see that real ROI of WFH models is much better than estimated ROI
Companies are going through tough times and want to preserve money. Given they are anyways sharpening their WFH tools and able to continue business using them, they might as well save money by avoiding to commercial real estate costs (For eg: Look from the eyes of a startup which is struggling for funding due to current external environment)
To bring in some practicality, WFH momentum will not materialize in A* / A category IT companies offices like Google / Microsoft / Amazon but I think this will be more of a trend in IT companies from low-end to middle-end.
Second order trends due to WFH momentum on various industries “assuming” WFH momentum will actually happen =>
Food:
People eat food from office cafeteria while working from office, but eat home cooked food / order online while working from home. Kitchen tools helping people to cook food easily, ready to cook foods might see some tailwinds. One can look out for Kitchen appliances companies to check if they come up with some innovative products. Office food catering companies might face some trouble. This would also increase sales in urban grocery stores.
Example Businesses with headwinds: Elior Catering
Example Businesses with tailwinds: Zomato, Swiggy, Tasty Bite, Marico, HUL, Big Basket
Electronics:
Spending 8 hrs in front of laptop sitting on Sofa / Bed is bound to cause permanent damage to backbone. Some of my friends already bought office chairs, desktop tables, monitors, spike guards. We might not see incremental demand as this is just replacing office demand with home demand. But one thing which stands out is Consumer AC. I’d prefer an AC in my room if I am to WFH till the time I can see.
Example Businesses with tailwinds: Voltas, Symphony
Entertainment:
I end up opening YouTube.com, Dominion.games while working from home while that is not the case when in office. Digital screen’s share of time will increase a lot and will be tailwinds for Digital Ads and Digital entertainment like OTTs.
I also think this will create a tailwind for exhibition companies like PVR (contrary to what most people are concluding). Working from home from Monday to Friday will make you feel like going out on weekends. You end up watching a movie in theatre, eating out with your friends.
Example Businesses with tailwinds: Google, Zee Entertainment, PVR, Inox Leisure, Wonderla
Personal / Skin Care:
You don’t use same amount of Hair oils / Serums, Face creams / Gels, bla bla bla while working from home. I haven’t used those stuff since last couple of days and don’t see myself using them in near future too. Just a simple bath and hand wash / face wash, full stop.
Example Businesses with headwinds: Marico, HUL
Shopping:
In last two weeks, only clothes I’ve been using are shorts / pyjamas / random T-shirts. All the good casual wear clothes / formal clothes / shoes are just sitting in the wardrobe. Likely to stay that way if WFH momentum stays. People will end up buying more Athleisure and avoid buying too many premium-ish clothes.
Example Businesses with headwinds: Aditya Birla Fashion, Arvind Fashions, Relaxo, Bata
Example Businesses with tailwinds: Page Industries, Lux Industries
Auto:
WFH momentum would lead to less usage of cars and that can lead to fall / lower growth in sales.
Real Estate:
Fall in commercial real estate demand due to WFH momentum is more or less derived by everyone. Real Estate developers might shift their focus onto Residential real estate projects. They might offer apartments which have dedicated space / setup for WFH. One can watch-out for such builders if WFH momentum actually plays out.
Pharmaceuticals:
People don’t get to spend time in the sunlight as there is no travelling to and from office and we might see a spike in Vitamin D deficiencies. Already see some discussions about possible increase in births after nine months due to current lockdown. May be there are some pharma companies focussed in these areas.
I want to re-iterate that I have just listed the trends and businesses impacted due to that. It may or may not move the needle for the company and trend materialization may not necessarily increase free cash flow for the company and may not give abnormal returns. We can take those company specific discussions to their respective threads.
Discl: I have mentioned example businesses for most of my observations but I request everyone to analyze if they will actually move the needle before investing. I may / may not have investments in the companies mentioned above. Please consult your investment advisor and do your due diligence before investing.
