Exports, Better Balance Sheets to Help Businesses Cope with Wave 2 Impact: Report
Partial to full lockdowns imposed by various states to contain the second wave of the pandemic are expected to have a moderate impact on the overall business environment, given strong export demand and improving balance sheets over the past six years. past months, according to a report. .
While supply chain disruptions can occur, the overall impact on businesses is expected to be moderate to minimal. But small businesses and retail borrowers are likely to be under strain, India Ratings said in a report on Monday.
He added that retail borrowers and small businesses will be under strain, leading to a build-up of potential asset quality issues in lenders’ unsecured loan portfolios and an increase in lighter delinquencies in the MFI segment.
The assessment will change if there is a strict national lockdown or a prolonged normalization of activities due to the pandemic, the agency has warned and warned that the economy in general will have a bumpy road to recovery.
The second wave of pandemic infections will be less disruptive than the first wave for all companies, despite the daily workload reaching more than four times the maximum level observed in the first wave. Indeed, the administrative response is likely to be limited to regional / local lockdowns and containment zones.
The agency estimates that the first-order impact on businesses will be minimal to modest depending on the industry and size of the entities, as it believes businesses are better prepared to operate in localized foreclosure conditions while respecting various guidelines.
Exports are another catalyst, pointing out that while restrictions on economic activities will reduce some of aggregate demand, export growth could compensate as much as the global economy is currently recovering.
Export growth has been reasonably strong over the past six to eight months and is expected to hold up given the fiscal push in its major export destinations. Therefore, the impact on revenue (profits) for industries other than offline retail, entertainment, hospitality, travel and related services will likely be minimal for medium and large businesses.
The agency also estimates that corporate margins could decline from exceptionally strong levels in the second half of FY21, mainly due to the return to normal and the unfavorable impact of rising commodity prices. .
The impact on margins will be disproportionately higher for medium and small entities than for large entities of the commodity user groups.
The agency also argues that corporate balance sheets have gained resilience, given healthy pre-tax margins and strong cash flow since the second half of 2020-2021. In addition, free cash flow for most segments improved due to deferred capital spending (capex) and reduced working capital, with excess cash being used by many entities to reduce debt or kept as a cushion on the balance sheet.
Healthy balance sheets will provide the backup large entities need to deal with temporary disruptions, if any in the short term, the report says.
Another catalyst this time around is a more manageable workforce challenge, although there may be a period of disruption. Unlike last time, the challenge of reverse migration is not significantly visible. Industries such as automobiles, auto accessories, and cotton may face challenges, while paper and chemicals may remain broadly unchanged due to reliance on local labor.
On the other hand, the construction activity will be affected due to the limited availability of key resources due to the restrictions imposed or the increase in infections, although a part is managed by the retention of personnel on construction sites. construction.
Later in April, the agency revised its GDP growth forecast for fiscal year 22 downward to 10.1%, from 10.4% on April 23.
As a result, the demand-side components of GDP – private final consumption expenditure, general government final consumption expenditure and gross fixed capital formation are now expected to grow by 11.8%, 11% and 9.2% year-on-year. annual, respectively, in fiscal year 22. This compares to the agency’s previous forecast of 11.2%, 11.3% and 9.4%, respectively.
The recovery will be slow and bumpy given moderate additional countercyclical fiscal spending. In addition, the nature of budget support will be indirect and supportive, rather than any direct stimulus to increase aggregate domestic demand conditions.
In addition, rising inflation will restrict any significant monetary support through lower interest rates. Given these two limited levers, the recovery trajectories of certain sectors, in particular those related to services and social distancing, could extend beyond fiscal year 22, the report said.