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Covid weakens Q4 earnings, consumer and commodity-linked sectors worst hit: Icra

Already weak consumer sentiment was further impacted by the lockdown, coupled with subdued infrastructure activity and benign commodity prices, says Icra

Outbreak of covid-19 pandemic and subsequent nationwide lockdown worsened business environment in March quarter as Indian Inc was was already reeling under multiple headwinds since beginning of financial year 2020. According to Icra, profitability was hit due to weak sales, subdued realisations in select sectors, and impairment of investments and business provisions due to the pandemic.

"Already weak consumer sentiment was further impacted by the lockdown, coupled with subdued infrastructure activity and benign commodity prices," it said.

An Icra analysis of financial results of 184 companies excluding financial sector showed an annual and sequential contraction in revenues with aggregate revenues contracting by 2.9% on a year-on-year basis in Q4 FY2020. During the same period, the EBITDA margin contracted by 30 basis points (bps) on a YoY basis, and by 120 (bps) sequentially to 16.8%, while profit before tax (PBT) margins fell to multi-quarter lows of 7.1%. Absolute earnings of these companies contracted by 22% and 12% in Q4 FY2020 and FY2020, respectively.

According to Icra’s estimates covid-19 impact is expected to be even more pronounced during Q1 FY2021 due to the stringent two-month long nationwide lockdown in the country during the quarter.

Financial performance of the Indian Corporate sector in Q4 FY2020 were primarily hurt by consumer and commodity-linked sectors, both of which were impacted significantly as the pandemic started spreading rapidly, Shamsher Dewan, Vice President - Corporate Sector Ratings, Icra said.

Despite some uptick in the initial months of the last quarter, major consumer-oriented sectors such as FMCG, consumer durables, auto original equipment manufacturers (OEMs) and ancillaries, reported either decline or marginal growth in sales volumes, weighed down by subdued consumer sentiments and increased wariness. “This was further compounded by the nationwide lockdown imposed in the country from 25 March. On the other hand, tepid realisations driven by softening commodity prices (in line with global trends), coupled with subdued volumes in light of the pandemic outbreak and macroeconomic slowdown, resulted in revenue contraction for major commodity sectors, including oil & gas entities, metals & mining and iron and steel," he said.

However, it said that reduction in lease rentals due to lockdown has contributed positively to EBITDA, despite which the margin contracted, reflective of the sharp pressure on operating profitability during the quarter.

The interest coverage ratio of ICRA’s sample, adjusted for sectors like IT, FMCG and pharma which low debt levels also witnessed a YoY and sequential weakening to 3.0 times from 3.5 times in Q3 FY2020 and 3.6 times in Q4 FY2019, highlighting the pressure on credit profiles of entities. Sectors like airlines, telecom and construction saw significant increase in interest costs on a Y-o-Y basis on account of the same. At the same time, EBITDA contracted due to negative operating leverage. Interest cover in select stressed sectors like power and real estate even slipped below 1.0 time, highlighting serious credit concerns.

“Going forward, the priority of India Inc. would be on managing liquidity, cutting costs and improving digital infrastructure, wherever possible. Pay reduction, employee rationalization and renegotiating on vendor agreements like lease rentals has already been effected by many corporates. However, despite these efforts, credit implications of the pandemic will remain significant for many entities," Dewan added.

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