Analysis: Impact of COVID 19

Textiles

1)    Raw Material Unavailability (No imports)

India imports US$ 460 million worth of synthetic yarn and US$ 360 million worth of synthetic fabric from China annually. The country also imports over US$ 140 million worth of accessories like buttons, zippers, hangers, and needles.  India does not have the domestic supply base to cater to such a huge demand for these raw materials. In case the outbreak continues, Indian garment manufacturers would have to look for alternatives sources, including local sourcing. This may increase the cost of finished goods by 3-5%.  In addition to this, both quality and cost may have an adverse impact due to this change.

2)    Labor Supply

This industry is the workplace for over 45 million people in the country but temporary closure of production units have increased their hurdles leading to lay-offs.

3)    Restricted demand due to limited movement of people and purchasing ability (No exports)

India also exports 20-25 million kg of cotton yarn a month to China. There has been a drop in cotton yarn prices in the domestic market as traders have anticipated a decline in demand from China due to the current situation. Moreover, textiles exports have also been impacted due to the spread of Covid19 in Europe, UK, and the US, which are the main markets for Indian garments. Inventories have piled up as many foreign buyers have put their purchases on hold. Also, many of them are deferring their payments for goods that have been shipped already. If the condition continues to remain the same, exporters may have to cut production which will impact jobs as well.

4)    Conclusion:

The termination of exports and imports have an adverse impact on the spinning mills in India as the exports of fabric, yarn, and other materials have disrupted. Apparel & Textile will get hit adversely due to disruption in labor supply, raw material unavailability, working capital constraints and restricted demand due to limited movement of people and purchasing ability.

Auto Sector (Which Includes Automobiles and Auto Parts)

1)    Introduction

This will continue to face challenges on account of lack of demand, global recession and falling income levels. With almost all plants shut and imports being sealed up, there is a steep decline in production and sales of the automobile companies impelling them to declare pay cuts. The situation will be awful even during post lockdown period due to fall in income levels

2)    Lack of Imports Leads to Lack of Raw Material

China accounts for 27% of India's automotive part imports and major global auto part makers such as Robert Bosch GmbH, Valeo AS, and ZF Friedrichshafen AG have factories located in the Hubei province. Owing to the closure of the factories of these companies, there has reportedly been a delay in the production and delivery of vehicles like Bharat Stage Four (BS-IV) compliant models. Moreover, the situation has become more precarious after the decision of the Chinese government to limit all shipments by sea until further notice. Since air shipments are not suitable for Auto Components and forging industries, the Indian OEMs are finding it difficult to plan production beyond the available inventory.

3)    Statistics

According to a report released by the Fitch Solutions recently, vehicle production in India is likely to contract by 8.3% in 2020 following an estimated 13.2% decline in 2019. Covid-19 will also make the transition to Bharat Stage Six (BS-VI) emission norms difficult which are scheduled from 1st of April 2020

4)    Uncertainty surrounding the coronavirus

Uncertainty surrounding the coronavirus has also impacted the demand for vehicles as consumers have been postponing their vehicle purchase decisions. The Federation of Automobile Dealers Association (FADA) has expressed concern over the availability of BS-VI vehicles which has been impacted due to the COVID-19 situation in China. This has made the transition difficult for the sector and hence the 2020 outlook is negative.

FMCG 

1)    Introduction

FMCG & Retail will benefit immensely. With continued fear, food-based retail chains, and companies catering to low-ticket consumption demand will emerge as winners. 

2)    The availability of labor

The availability of labor is another challenge since most have moved back to their hometowns. There is immense pressure on the supply chain, and it is expected to take a minimum of 2-3 months to ease out. Lockdown created panic among the migrant laborers. After the lockdown was announced, the migrant laborers en-masse began their journey back to their hometowns, which crippled many of the sectors, including the core sectors.

Manufacturing & Supply chain operations are facing huge disruptions in terms of sustenance and the negative impact of cost-efficiency. Safety concerns, besides fear and panic, are foremost in the minds of migrant laborers right now and it will take time for the situation to normalize before they return to resume work. Supply chain issues will also get resolved slowly as the Inter-state movement of heavy vehicles get allowed.

3)    The shift in Brand Loyalty

Lockdown-led supply niggles, particularly on grocery essentials, gave way for the private labels to capture the shelf space for many retailers. Concerns over supplies have led to some shift in brand loyalty. The consumers seem to have gladly transitioned to the next best substitute available on the shelf and to an extent become brand agnostic. Only time is the true testament and will define whether this shift is permanent or temporary.

4)    Contraction due to income decrease

Aside, from the surge in the unemployment rate, the average wallet size of the consumers has contracted and the same reflects in the GDP projections being pegged by various rating and research agencies at about 1% for 2020-21. The impact of the lockdown and pandemic-led recession is expected to play out through the year.

5)    Change in Preferences

In-demand products for FMCG majors are food and hygiene products as consumers continue to stock up, dine-in and load up on sanitizers and soaps.

6)    Statistics (5/7/20)

~       Large consumer goods companies HUL (NSE 1.02 %), ITC (NSE 0.83 %), Parle Products, Britannia (NSE 0.09 %), Marico (NSE 0.24 %) and Dabur (NSE 0.43 %) are expanding production capacities beyond pre-Covid levels.

~       India’s largest food company, Parle Products, said it will expand capacity by 25% over normal. The maker of Parle-G and Hide & Seek biscuits reached the pre-Covid production level this week.

~       Dabur India CEO Mohit Malhotra said there was a 400% surge in demand for immunity booster chyawanprash and 80% growth in demand for honey.

~       An ITC spokesperson said capacity is at ‘reasonable’ levels and the company has seen a surge in demand for FMCG products, including staples, biscuits, instant noodles, and snacks.

 

Aviation & Tourism

1)    Change in preferences due to uncertainty

With large scale cancellation of travel plans by both foreign and domestic tourists, there has been a drop in both inbound and outbound tourism of about 67% and 52% respectively from January to February as compared to the same period last year. Of all the segments of the hospitality sector, the Meetings, Incentives, Conferences and Exhibitions — popularly known as MICE segment — has been hit the most. Some of the major international business events have also been canceled including tech events such as Mobile World Congress (MWC), Google I/O, and Facebook's F8 event, which has led to huge economic losses.

There is a great scope for India on cultural and historical tourism which attracts domestic and foreign nationals throughout the year. As a result, a large number of COVID-19 cases are foreign tourists. The matter of concern here is that since visas are being suspended and tourist attractions are shut down for an indefinite period, the whole tourism industry took a great hit. There is a great loss on the part of attractions, restaurants, agents and operators, and hotels. It is expected that the pandemic could end up crippling the tourism industry for the near foreseeable future.

Aviation is amongst the worst affected sector amidst the Covid-19 crisis that has taken the scale of a pandemic. According to the International Air Transport Association, airlines globally can lose in passenger revenues of up to US$ 113 billion due to this crisis. Airfares have also come under pressure 7 due to a nearly 30% drop in bookings to virus-affected destinations. As a result, airfares to such destinations have fallen by 20-30%. Domestic traffic growth is also gradually being affected with domestic travelers postponing or canceling their travel plans. Some companies have reported more than a 30% drop in domestic travel this summer compared with last year. Airfare in the popular domestic routes has been reduced by 20-25% and airfares are expected to remain subdued for the summer season as well. According to the data available with the Ministry of Civil Aviation, nearly 585 international flights have been canceled to-and-from India between February 1 and March 6 because of the outbreak of coronavirus. Cash reserves of airline companies are running low and many are almost at the brink of bankruptcy. Moreover, the crisis could lead to the loss of many jobs. Already, some airlines have asked many of their staff/ employees to go on leave without pay. The airline industry needs an urgent bailout from the Government.

2)    Statistics

The tourism industry expects the situation to further deteriorate in March and in the forthcoming summer season i.e. April-June. Usually, the number of Indian travelers to both domestic and international destinations peak during the months of March and April. However, this time around nearly 90% bookings of hotel and flights for the peak time has been canceled. Cruise bookings for destinations such as Thailand, Singapore and Malaysia has also been canceled by travelers in huge numbers. According to the Indian Association of Tour Operators (IATO), the hotel, aviation, and travel sector together may incur a loss of about Rs 8,500 crore due to travel restrictions imposed on foreign tourists by India for a month. This is also expected to have a negative impact on jobs in the industry. The travel business has also been affected deeply

Ever since the Indian government suspended domestic and international flights, the Aviation Industry is suffering a daily loss of Rs. 75-90 crore and the Indian aviation industry will require additional funding of Rs 325-Rs350 billion over FY 2021-2022 according to rating agency ICRA limited. In short, the aviation industry is undergoing severe losses since the flight operations were canceled. The pandemic has affected the industry that it will need either a government package or has to levy additional charges on the passengers to be back on the track.

3)    Decline in income

Consumption is also getting impacted due to job losses and a decline in income levels of people particularly the daily wage earners due to slowing activity in several sectors including retail, construction, entertainment, etc. With widespread fear and panic now increasing among people, the overall confidence level of consumers has dropped significantly, leading to the postponement of their purchasing decisions.

4)    Conclusion

Aviation and tourism are one sector that has the highest probability of going under without direct government intervention. In the next 12 months, it’s highly unlikely people will travel for leisure apart from very essential travel. Travel restrictions have severely impacted the transport sector. Hotels are seeing large-scale cancellations not only from leisure travelers but even business travelers as conferences, seminars and workshops are getting canceled on a large scale.

Pharmaceuticals

1)    Introduction

Pharmaceutical firms are set to see growth in the near term.

2)    Lack of Raw Material due to Closing of Imports

These industries highly count on the import of bulk drugs and several raw materials from China. Due to import restrictions these industries are also impacted.

India imports about 85% of its total requirement of active pharmaceutical ingredients (APIs) from China, according to the Trade Promotion Council of India. In 2018-19, around 67% of total imports of bulk drugs and drug intermediates were sourced from China. As per the records of Pharmexcil, out of the total 58 molecules that are imported from China, 12 are imported from the Hubei province which is the epicenter of coronavirus. With the situation still remaining critical in China particularly in Wuhan, supply disruptions from China are likely to continue for several weeks more.

3)    Increase in Customers due to change in Preferences

The active pharmaceutical ingredients (APIs) are essential for any country for pharmaceutical manufacturing countries. As COVID-19 cases in India are increased to, medicines are going to be increasing in demand since there are not enough APIs to manufacture and therefore the market will witness all-time high prices.

 

4)    Uncertainty and Fear leading to increase in prices

Amidst uncertainty over the future supply of bulk drugs and intermediaries from China, the possibility of a shortage in the availability of medicines in India has led to an increase in prices of some items like paracetamol which has seen a price hike of about 40%. The scenario has put negative pressure on some raw material items as well like the price of Penicillin G, a key raw material used in antibiotics has reportedly gone up by about 58%. A committee has been formed by the Department of Pharmaceuticals to regularly review the availability of stocks of API. The drug regulatory authority has reported to the government that the stock of 57 APIs (amoxicillin, ofloxacin, vitamin tablets, and capsules such as B12, B1, B6) could soon run out. In case the supply disruptions continue, it could affect pharma production levels adversely. The government has restricted exports of certain medicines to deal with the situation.