Markets will digest dent on June quarter earnings as one-time hit: CLSA

If India is unable to slow the number of infections, additional lockdown measures might be required, which analysts at Rabobank International say would negatively impact the supply side of the economy

The ongoing second wave of Covid infections and the ensuing lockdown across key economic hubs will dent corporate earnings in the June 2021 quarter (Q1FY22), but the markets will take this in their stride and digest them as a one-time hit look forward to growth as the economy normalises after this wave, believe analysts at CLSA. 

Using trends from the second wave of Covid-19 in 12 countries and four key parameters – duration in days, reported cases as percentage of the population, cases from start to peak of the second wave as a percentage of the population and infected plus vaccinated as a percentage of the population – the research and broking house expects the second wave in India to peak by June. Economic normalisation, it said, is likely by August – September 2021.

“India may see a peak in the 7-day moving average (DMA) of new cases by June 2021. This peak in Maharashtra may have already happened. Haryana, Delhi and Andhra Pradesh may be the next to peak. Using the mid-date of the predicted range, 11 of these 16 states may see a peak from this wave by the end of Jun 2021. These make-up 47 per cent of India’s population and 65 per cent of gross domestic product (GDP),” the May 12 CLSA report authored by Vikash Kumar Jain said.

Compared to cumulative testing equal to 22 per cent of national population, Madhya Pradesh (10 per cent), West Bengal (11 per cent), Rajasthan (12 per cent) and Uttar Pradesh (19 per cent) have tested much lower proportions of their respective populations, CLSA suggests. 

Timeline

“This may suggest a higher chance in under-reporting cases in these states and may also impact the accuracy of predictions regarding the peak. West Bengal, Madhya Pradesh, Telangana, Uttar Pradesh and Bihar may be last to peak, i.e. after July,” Jain wrote.

Economic pain and stimulus

Economic pain, most analysts believe, will be restricted to the second quarter of this fiscal (Q2FY22) as the stringency of the lockdown measures are relatively low as compared to the first wave in 2020. Yet, leading brokerages and rating agencies, including Moody’s, Nomura, Crisil, QuantEco Research and CARE Ratings, have cut India’s GDP growth estimates for FY22.  

From a growth perspective, analysts believe the sequential recovery is likely to get pushed back by a quarter. The growth setback in Q1FY22, according to analysts at QuantEco Research, will be dominated by demand deferment as opposed to Q1FY21, which saw massive supply disruptions. 

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“Our updated FY22 GDP growth estimate stands revised lower by 150 basis points (bps) to 10 per cent, but we remain confident that as the ongoing wave ebbs and vaccinations pick up pace, sequential growth recovery could look better Q3FY22 onwards,” wrote Shubhada Rao, founder, QuantEco Research in a co-authored note with Yuvika Singhal and Vivek Kumar, their economists.

If India is unable to slow the number of infections going forward, additional lockdown measures might be required, which analysts at Rabobank International say would negatively impact the supply side of the economy. As a result, the new wave of infections, they believe, might require additional government stimulus to help prevent large economic contractions and/or negative economic spillovers into the rest of 2021.

“If the Indian government increases spending in the form of a second Covid-19 stimulus package, it will probably prevent a loss in economic output in the short-term, but this simultaneously puts more pressure on the sustainability of debt in the longer term, essentially mortgaging their future,” says Wouter van Eijkelenburg, economist for Australia, New Zealand, India, ASEAN at Rabobank International.

Second wave: World view