Second Covid-19 surge will drag earnings recovery for India Inc: Moody's

Automobile, housing sales to be hit; drop in fuel demand seen; Steel firms to see limited impact on output despite O2 diversion

The sharp rise in Covid-19 infections under the second wave will disrupt the earnings recovery of companies recorded over the past six months. A prolonged and wider lockdown will have a more severe effect on earnings recovery, according to Rating agency Moody's.

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 impact companies' earnings recovery more severely.

Movement restrictions and weaker consumer sentiment under 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.

The demand for IT and telecommunication services will remain strong despite expectation of a slowdown in economic activity over the next few months, it added.

Kaustubh Chaubal, a Moody's Vice President and Senior Credit Officer said a 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.

Meanwhile, Tata Steel Ltd (Ba2 stable) and JSW Steel Limited (Ba2 stable) have diverted part of their oxygen producing capacity towards medical use amid shortages, but the scale of their 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 per cent growth.

Still, high government infrastructure spending and supportive housing demand underpin the sector's fundamentals and support UltraTech Cement Limited's (Baa3 negative) earnings.

Refinancing risk will be manageable for most issuers given their access to funding markets because of their strong balance sheets or status as government-owned or linked companies. However, refinancing could be a problem for companies with weaker balance sheets.