(This story was last updated on March 23)
Turbulence in the skies: Travel bans across the globe have hit the aviation industry hard. But airlines are preparing to fly through uncertain times.
In early March, Hong Kong-based Cathay Pacific cancelled over three-quarters of its weekly flights; in the U.S., United Airlines cut down its domestic and international operations by 10% and 20% respectively. Across the pond, British Airways nixed over 400 flights. The novel Corona-virus (Covid-19) had hit the aviation industry hard.
And then, by mid-March, things got worse. The U.S.suspended all travel from Europe; back home, India has virtually closed its borders by suspending tourist visas till April 15 and not allowing any international commercial flight to disembark passengers in India, for a week starting March 22. The International Air Transport Association (IATA) estimates that the global aviation industry could report passenger ticket revenue losses of between $63 billion and $113 billion on account of the Coronavirus outbreak.
According to IATA, airline share prices have fallen nearly 25% since the outbreak began, “some 21 percentage points greater than the decline that occurred at a similar point during the SARS crisis of 2003.” India’s largest airline, IndiGo, saw its stock price fall by 16%, according to an HSBC Broking report, while SpiceJet’s was down by 31%. “Although the broader [Indian] markets are down, both airlines have underperformed the local index, by 7% and 24%respectively over the last month,” said the report. On its part, IndiGo cautioned investors that its quarterly earnings could be severely impacted. “Over the past few days... week-on-week,we have seen a 15% to 20%decline in our daily bookings,” IndiGo said in mid-March. Credit rating agency Acuité Ratings believes that the drop in domestic passenger traffic over the next three months can be as high as 50%. Inevitable losses notwithstanding, IndiGo and Vistara have waived cancellation fee on tickets booked after specific dates in March.
— Anshul Dhamija
For now, slow and unsteady: India’s auto industry, already grappling with a slowdown, faces new challenges.
India’s auto industry, already hit by a slowdown in the past year, is expected to face another hit because of the Coronavirus outbreak. Rajan Wadhera, president of SIAM (Society of Indian Automobile Manufacturers)—and president (automotive) at Mahindra & Mahindra—says automakers in India import about 10% of their raw materials from China. “Manufacturers are exploring alternatives to fulfil their supply chain demands but that would also take... time to reach stable production scale as these components would need regulatory testing,” he says.
There can be two major impacts on the auto industry, adds Gaurav Vangaal, senior analyst, automotive forecasting (light vehicles)at information and analytics company IHS Markit.“One is direct to those carmakers who have CKD (completely knocked down) sourcing from China,” he says. “The other is indirect,which comes from the supplier component side. This can bring a major impact[on the supply of] electronic, or EV, components like printed circuit boards,semiconductors, etc.”
A CRISIL Research report says that 18% of automobile components, including drive transmission, steering, engine components, etc., come from China. But while factories are slowly coming back to life in China, Indian auto majors are suspending production as India too goes under lockdown.
— Prerna Lidhoo
Recovery should follow volatility, say experts.
The coronavirus (Covid-19) outbreak has led to India’s benchmark indices catching a chill. The Nifty 50 and S&P BSE Sensex have lost over 4,846 points and 16,393 points, respectively, between January 20 and March 23. These indices have lost 38.99% and 38.78%, respectively, in a matter of just 45 trading days since they touched their lifetime highs.
“This heightened volatility and the general risk-off attitude in the global markets is due to the uncertainty and fear created by Covid-19, and the unprecedented actions of the governments to contain it,” says a note from Kochi- headquartered Geojit Financial Services. The note assures investors that they would eventually do well as markets have historically faced such situations and, more importantly, recovered from them, albeit over varying time frames.
Gautam Duggad, head of research-institutional equities at Motilal Oswal Securities, says there could be a 10% cut in the earnings estimates for FY21 of Nifty 50 companies because of both global and local headwinds and disruptions owing to the outbreak of Covid-19. He also highlights that India’s market capitalisation-to-GDP ratio, which was quite stable for FY15 to FY19 in the 70%-80% band, has fallen swiftly from 79% as of FY19 to 58% for FY20’s estimated GDP.
According to him, the so-called bull-run that the benchmark indices witnessed through 2019, and also in early January this year, was because of polarisation. While the Nifty top 15 companies gained 10%, the rest were down 36% since December 2017. Year-to-date, the Nifty top 15 are down 24%, while the other 35 stocks have declined by 27%, Duggad points out.
“If history is [what we] go by, markets usually rebound the most in three-six months post sharp corrections,” says Duggad. “Except one instance during the tech meltdown of 2000, markets have delivered positive returns in the subsequent 12-month period.”
Analysts at Geojit Financial Services seem to agree. The sharpness of the recovery would depend on how fast the threat recedes and how fast the global economy is expected to get back on track, they say.
No end to gloom: Inevitably, no travel means low business for the hotel industry
The coronavirus pandemic and consequent travel bans have meant a huge setback for India’s hospitality sec-tor, which had just about started recovering from a slowdown in the previous fiscal (FY19).
But, now, FY20 will end on a gloomy note too. A recent research note by Edelweiss Securities points out that occupancy and tariffs in hotels are likely to be impacted in March and the first quarter of FY21. Inevitably, hotels with a higher share of foreign guests and MICE (meetings, incentives, conferences, and exhibitions) will bear a greater brunt due to the ban on entry of visitors into the country as well as mass cancellation of various industry events.
Indian Hotels Co. Ltd (IHCL), which operates hotels under the Taj brand across India and abroad, is likely to be more impacted,given that foreigners comprise around 35% of its customer base, the Edelweiss note said. In February, IHCL MD and CEO Puneet Chhatwal had said it was too early to quantify the exact consequences of the pandemic, but these were likely to unfold March onwards. Between March 6 and March 13, IHCL’s stock declined 8.5% on the BSE.
Ajay Bakaya, MD of Sarovar Hotels and Resorts,which runs 84 hotels in the country, says his firm had missed its revenue target by 20% in March and occupancies had fallen to 65% from 95% in the beginning of February. “We are fortunate that the peak travel season and marriage season are behind us. Our properties, like the one in Bengaluru, which have a greater connection with foreign traffic, have been impacted more than others,”he says, adding that it is difficult to predict how long the impact would last.
- Aveek Datta
A grim prognosis: In the short to medium term, operations of pharma firms may not be overly impacted. But the outlook is bleaker if the situation persists.
India imports 69% of its total pharma bulk drugs intermediates, such as active pharmaceutical ingredients,from China, according to a CRISIL report. But “players have sourced their raw materials and created buffer stocks for two-three months, ahead of the holiday period in China”, the report adds. This has given the pharma companies some breathing space, although “there may be some shortage of intermediates in the short term and prices may increase by 10%-15%,which may hit the profit-ability of some companies”, says Pranav Amin, MD, Alembic Pharmaceuticals.
The future outlook will depend on how the situation plays out in China. As Kedar Upadhye, joint president and global CFO of Cipla, says, there is no alternative to the high dependence on China for intermediates in the medium term since the country has built massive capacity for these products over the years. “The plants in China have started working again, though not at full scale, and the port is also partially operational. So we are getting some shipments in India again,” Upadhye says.
To mitigate future risks,India will need to look at diversifying its sources of procurement, including through domestic manufacturing, says Amin.
Meanwhile, in anticipation of the pandemic boosting the sale of drugs, the S&P BSE Healthcare Index had shot up (by 5.42%) between March 2 and March 5. But the index saw a sharp fall thereafter (10.4% as of March 13) as it became clear that the global supply chain will remain impaired for some time to come.
— Aveek Datta
Losing its sparkle: COVID-19 casts a shadow on an already beleaguered diamonds industry.
There is an acceptance of the new business realities in Surat, the hub of diamond trade in Gujarat, India. As Surat-based Dinesh Navadiya, regional chairman of the Gems and Jewellery Export Promotion Council,points out, “The [Covid-19]outbreak is clearly a problem for Surat’s diamond industry which exports 94% of its total production,and China and Hong Kong account for 41%.” He estimates Surat’s annual trade with China and Hong Kong at upwards of `45,000 crore. “With a prolonged shutdown in Hong Kong, payments and settlements have been affected,” he says.“While businesses won’t get shut, we will have liquidity issues.”
Many Gujarati diamond merchants have their trading offices in Hong Kong, while their production facilities are based in mainland China. But now, says Pravin Nanavati, a former president of the Surat Diamond Association (SDA), “Indians involved in Hong Kong’s diamonds business have also shifted back.”
The complete halt to business with the region is a further blow to India’s diamond industry which was already facing head-winds. C.P. Vanani, another former president of SDA, pegs the losses at `8,000crore -`10,000 crore. And counting. The industry-wide fall in sales is around 30%, says Sevantilal Shah, founder partner of Venus Jewel, adding, “No one knows what will happen in the near future.”
— Rajiv Bhuva
Shock on and off the shop floor: On the one hand, the challenge of supply chain issues in China have manufacturers worries. On the other, companies have been forced to halt their consumer-facing activities.
Indian consumers started to feel the pinch of the Coronavirus outbreak back in mid-February, when Chinese smartphone maker Xiaomi was forced to raise the price of its popular handset, the Redmi Note 8,which was hit by the supply chain crisis in its home base.“While we are working to explore alternative supply channels for components and raw materials, the immediate impact is that the short supply might cause some negative pressure on prices of these components,”a Xiaomi India spokesperson said at the time.
The rapid spread of the Coronavirus may lead to severe global implications,say experts. “With China being much more deeply integrated with the world economy today... com-pared to the 2003 SARS outbreak, the impact of the [Coronavirus] outbreak is expected to be far more pronounced,” says Neha Anna Thomas, senior economist, Frost & Sullivan.
The impact will be felt across industries, and consumer electronics is expected to be one of the worst hit. “The electronics manufacturing community is facing an unparalleled challenge due to the short-age of products and parts being produced in China,”says Chandra has Panigrahi, CMO and consumer business head, Acer India.“India’s manufacturing industry has been obstructed hard due to the disruption in the supply chain following the extended shutdown of Chinese factories due to the Coronavirus epidemic.”
Even consumer-facing activities—such as conferences and physical launch events—have had to be stopped.
— Abhik Sen
Switching gears to survive: From sales predictions to style of working to future funding, tech firms have had to rethink it all.
Large technology companies, with global operations,are already revising the way they operate, from encouraging work-from-home to stopping non-critical business travel over Coronavirus fears. Indian IT major such as Tata Consultancy Services, Wipro and HCL Technologies have followed suit as well.
Apart from the style of functioning, there are business consequences too. Take the venture capital community—a primary stakeholder here—that is ensuring that portfolio companies are aware of, and prepared for, the potential fallout.
On March 6, in a note to the founders and CEOs of its portfolio companies,Silicon Valley-based venture capital firm Sequoia Capital asked them to prepare for worsening economic conditions. Sequoia—one of the world’s most prolific venture capital firms with investments in companies like Google, Oracle, Nvidia and YouTube—said in its memo: “Private financings could soften significantly,as happened in 2001 and 2009. What would you do if fundraising on attractive terms proves difficult in 2020 and 2021? Several companies that were on track are now at risk of missing their Q1-2020 plans as the effects of the virus ripple wider. The lockdown in China is directly impacting global supply chains.”
The Indian funding economy is also seeing the impact of Coronavirus, says Roma Priya, founder, Burgeon Law, a startup-focussed law firm. “We are getting a lot of queries from promoters about the potential extension of funding rounds and impact on closure. Most promoters are looking at extending the runway of their current capital to ensure they get past the prevailing uncertainty in the investment space.”
Tech giants with higher exposure to China have also already alerted investors about declining sales.
— Debojyoti Ghosh