Coronavirus isn't a bottom fishing opportunity, poses big risk to India Inc

On a day when heavyweights and investors’ favourites such as Bajaj Finance, Tata Consultancy Services, Reliance Industries, and Hindustan Unilever — which are also perceived to be relatively insulated from macroeconomic risks — fell by 3-6 per cent, it is quite an indication of the problem the market is anticipating.

Amar Ambani, senior president, YES Securities, warns that unless one has a strong heart and wallet, the 7 per cent correction in the Sensex over the week doesn’t present a buying opportunity. “Only the brave can bottom fish in this scenario,” he adds.

Agreeing with Ambani, Pankaj Pandey, head of research at ICICI Securities, doesn’t rule out the possibility of further correction if more coronavirus (Covid-19) cases are reported across the globe. While a section of domestic investors is optimistic that the virus’ spread in China could open up the manufacturing floodgates for India, the near-term picture is different. 

For instance, while China accounts for 14 per cent of India’s imports and 5 per cent of its exports, about 30-40 per cent of raw materials in sectors such as bulk drugs, electronic components, and engineering equipment comes from China. 

Even if the current quarter is protected in terms of raw material supplies, the question is whether there is enough for production thereafter.

Though migrating to other countries for supplies is an option, it entails additional costs. Analysts say that considering the current demand scenario, it will be tough for manufacturers to pass on costs. “Companies have two options — one is to sell less, which will result in a fall in revenues, or, second is to maintain revenue and take a hit on operating margins,” says Pandey. 

Either ways, he believes that as against double-digit revenue growth anticipated in the June quarter, the number may shrink to mid-single digits. Reiterating Pandey’s views, analysts at Prabhudas Lilladher also anticipate that shortage of goods and sharp increase in prices could impact growth rates in the June quarter. 

Citing Hero MotoCorp’s recent announcement of a 10 per cent cut in production, they say this is an indication of how it can lead to delay in recovery if Indian manufacturing industries exhaust their raw materials inventory by mid-March. Moreover, coronavirus’ impact on other global economies and trade, and so India, isn’t clear too.

“At present, it is tough to comment on how long it would take for the situation to normalise,” Pandey adds.

Until there is a decline/peaking in coronavirus cases reported worldwide, experts say it’s tough to claim that equities have fully priced in its impact on India Inc’s earnings. So, even if the market corrects further, most experts concur that investors shouldn’t be tempted. Normalisation is the key, they caution.