India’s growth engine has eased off the throttle. The surging second wave of the Covid-19 pandemic has forced it to slow down and move at a moderate pace. After a rev-up in the fourth quarter of 2020-21, which resulted in an extremely good earnings season, the beginning of the new financial year is shrouded in opacity. In the first half of the June quarter, there has been a significant slowdown of mobile phone manufacturing, owing to localised lockdowns, a shortage of semiconductors, and a surge in viral infections in factories across the country.

After sales of automobiles, mobile phones, electronic equipment, air conditioners, air coolers, and refrigerators, among many others, hit a rough patch, policymakers and companies hope that the current phase will not be as terrible as the summer of 2020. Almost every category had seen a major dip last summer.

While the first wave last year was primarily restricted to urban centres, the new wave seems to have ravaged the rural markets. According to data shared by the Federation of Automobile Dealers Associations (FADA), two-wheeler sales in April 2021 dropped nearly 28% from the previous month to 865,134 units, while tractor sales, which have for long shown resilience, fell by nearly 45% from March. The overall sales in April reported a 28% fall month-on-month to 1,185,374 units, FADA said. Industry watchers aver that it is “bad news for the domestic auto industry” as it usually banks on rural sales to buffer slackening demand in urban India.

Image : Graphics by Rahul Sharma

“The re-imposition of lockdown measures will curb economic activity and could dampen market and consumer sentiment. However, we do not expect the impact to be as severe as during the first wave,” said Moody’s Investors Service in a statement.

Amid the devastating second wave, Moody’s has joined the ranks of other international rating firms in trimming growth expectations for Asia’s third-largest economy. It has cut India’s 2021-22 growth forecast to 9.3% from the 13.7% estimated earlier.

“Unlike the first wave where lockdowns were applied nationwide for several months, the second wave ‘micro-containment zone’ measures are more localised, targeted, and will likely be of shorter duration. Businesses and consumers have also grown more accustomed to operating under pandemic conditions. As of now, we expect the negative impact on economic output to be limited to the June quarter, followed by a strong rebound in the second half of the year,” said Moody’s.

S&P Global Ratings, too, slashed its forecast for India’s GDP growth to 9.8% from its earlier prediction of 11%, claiming that the second wave may derail the budding recovery in the economy and credit conditions.

UBS Securities India chief economist Tanvee Gupta Jain said in a note that their India economic activity index entered negative terrain in April with a fall of 7 percentage points to 95, primarily owing to the local lockdowns in key business centres. UBS expects activity levels to sequentially weaken further in May.

The consumer giants in the country, which had gathered growth momentum in the March quarter, are a worried lot. The rising cost of commodities, localised lockdowns, disruption of the migrant workforce, and a change in the spending habits of consumers do not augur well for them. On the flip side, they also have a huge social responsibility to help the country navigate out of the current turmoil spurred by stretched healthcare infrastructure and the acute shortage of oxygen supplies at hospitals.

Image : Graphics by Rahul Sharma

The March quarter earnings have shown how the biggies in the consumer space emerged from the pandemic that hit their revenue growth in early 2020-21. Some tweaked their strategies, launched new products, and promoted digital more in line with the efforts to minimise the impact of the virus. The quarterly numbers with a huge surge in profits—not completely unexpected given the low base a year ago—have given a big boost to sentiment in the country.

Among the consumer-focussed companies, Reliance Industries Limited (RIL), Hindustan Unilever (HUL), and Nestlé have clearly mirrored the growth India witnessed post the first wave in 2020. But without exception, everyone had a word of caution for 2021-22.

HUL, the country’s largest consumer goods company, reported 41% year-on-year growth in net profit to ₹2,143 crore in the fourth quarter ended March 31, 2021. The company, amongst the fastest to recover within the FMCG companies from the woes of a nationwide lockdown last year, had switched its attention to manufacturing products that were high in demand, including hygiene, healthcare, and nutrition products. It reportedly launched over 50 new products.

“We were riding a strong momentum going into the new fiscal, and the first two weeks of April reflected that sentiment. However, the last two weeks of April have seen some turbulence as Coronavirus cases have surged. The focus of all stakeholders should be on taming the virus and ramping up the pace of vaccination,” Sanjiv Mehta, HUL’s chairman and managing director, had said while declaring the March quarter results. In an analyst presentation, HUL said it was difficult to predict the demand outlook in the near term amid the Covid-19 surge.

RIL, despite doubling its consolidated year-on-year net profit to ₹14,995 crore in the March quarter, faced headwinds in the stock market as it fell short of analysts’ expectations. The second wave impacted Reliance Retail’s operations with only 44% of its stores staying open in April. In many cities facing local lockdowns, businesses, including digital commerce, are confined to essential items. The number of electronics, and fashion and lifestyle stores currently operational stands at 40%-50% of its network in April, down from 94% in the March quarter, it said. Grocery stores are operational at 80%-90% as against 95% reported in the fourth quarter, but operating at 50% efficiency. And footfall has dropped to 35%-40% of pre-Covid-19 levels as against 88% in the last quarter, according to the company.

RIL, which generated nearly 75,000 new jobs during the last financial year, has repurposed its Jamnagar facility to produce life-saving medical-grade oxygen. It is also setting up Covid-19 care hospitals for communities in dire need.

Meanwhile, the maker of Maggi noodles—Nestlé India, which reported a 14.7% jump in its March quarter net profit to ₹602 crore, which was marginally above the market’s estimates—may face headwinds too. In Q4, the packaged foods company clocked double-digit growth in domestic sales, supported by the surge in in-home consumption during the pandemic. Its revenue from operations for the quarter was up 8.5% at ₹3,611 crore yearon-year.

“While the Nestlé India family has learnt to cope with the operating volatility in the pandemic, recent sharp escalations in key raw material prices pose challenges that we will resolutely respond to while maintaining the integrity of our business model,” said Suresh Narayanan, chairman and managing director, in a statement.

Radhakishan Damani’s Avenue Supermarts, which runs the DMart hypermarket chain, said its business has been impacted due to localised restrictions imposed in several cities. The company, which runs 234 stores across the country, has sounded a warning over the rising Covid-19 cases. “Our business will continue to be dependent on the pandemic trends and the consequent restrictions for operating our stores,” it said.

Most companies are reinventing their strategies to combat the pandemic-induced demand recession. The June quarter results will likely indicate if they are on the right path.

(This story originally appeared in Fortune India's June 2021 issue).

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