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Below is the Views On COVID-19 pandemic to have cascading effect across value chain by Motilal Oswal Financial Securities Ltd
Corporate revenues to decline 4-7%; Risk lingering in several lending segments
To discuss the impact of the COVID-19 outbreak on the economy, credit outlook and the financial sector, we interacted with CRISIL Rating’s Managing Director and CEO, Ms. Ashu Suyash, and the entire top management team. Key insights highlighted below:
COVID-19 pandemic intensifies challenges world-over; corporate revenues to decline 4-7%
* The hit in consumption demand due to social distancing has led to serious implications across various segments of the economy. Weak domestic demand and slowdown in the global economy should impact export-oriented, investment and consumption-linked sectors.
* Export-linked sectors such as Textiles, Seafood, Gems and Jewelry, Leather and Engineering are facing slowdown pressures. Product exports should decline at a faster pace due to the slowdown in Europe and the US. In the IT space, maintenance projects should continue while new projects would face delays and postponement.
* Some of the consumption-linked sectors such as Hotels, Consumer Durables, Multiplexes, Retail Trade and Airlines have been witnessing a sharp drop in business; we believe this would have a cascading effect across the value chain.
* Supply chain disruption would be limited to few segments like agro chemicals, auto components, etc. Labor disruption would be a key challenge in sectors like Construction.
* The Auto sector would continue to see negative growth across vehicle segments. Passenger vehicles would be the worst impacted; we also expect ~20% volume decline in the Commercial Vehicle segment.
* Further, Infrastructure spending by the government should decline 8-9% as these funds would be diverted toward the Healthcare sector. Thus, Construction, Real Estate and Industrial Machinery along with sectors that are linked, such as Cement and Steel could see volumes plummet.
* Despite the plunge in crude and few other commodity prices, we expect overall corporate revenues to decline 4- 7% while EBITDA should decline 6-9% (there exists further downside risk to these estimates).
* Credit ratio (number of upgrades to downgrades) declined to 0.77% during 2HFY20 v/s 1.21% in 1HFY20. Given the challenging macros, we expect to see rating downgrades faster than rating upgrades.
Risks lingering in several lending segments; liability side challenges for NBFCs/HFCs
* The most resilient segment amongst various retail assets would be home loans as majority of the borrowers are salaried. Gold loans would see faster asset-backed recovery while vehicle loans would see disruptions, however, as economic activity resumes, this segment would reflect recovery trends. Further, the most vulnerable segments on the retail side would be LAP, MFI, unsecured loans and MSME loans. The RBI moratorium too provides some relief on the asset side while liability constraints remain a key challenge for NBFCs.
* Non-banks (NBFCs/HFCs) have high share of capital market borrowings where no moratorium has been announced so far by the RBI. Also, banks are not providing any moratorium to the NBFC sector. Thus, NBFCs could face ALM mismatch in the near term. NBFCs with good rating and strong parentage have liquidity cushion up to 2 months toward the repayment of capital market borrowings. Overall, we expect weak credit growth of ~3-4% for FY21E.
* CRISIL has cut GDP growth forecast for FY21E under base case to 3.5% v/s 5.2% projected earlier. Inflation, weak credit outlook and increase in rating downgrades in the system are the key risks to these estimates if the lockdown extends post Apr’20.
* Overall fiscal stimulus should be below 1% of the GDP with heavy reliance on monetary measures. Further, fiscal stimulus could be in the form of contingent liability where the government offers guarantees on loans.
* In the Life Insurance sector, ULIPs would be the most impacted compared to Term-Plan policies.
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