Covid-19 impact on sectors: Consumption story hits the slow lane

The last of a three-part series on the Covid-19 pandemic’s impact highlights the issues faced by the consumption and media sectors. 

While the impact is less on fast-moving consumer goods companies selling essential goods, the supply-side disruption at both production and distribution levels, as well as changing customer preferences, is denting the overall demand and sparing none. 

The fall in discretionary spends is apparent, given fewer sales of air conditioners in the middle of the peak summer season. 

For the media space, the dip in advertising revenues is getting worse as corporates are reining in discretionary spends and promotions to cut costs. 

The Rs 20-trillion stimulus package announced by the prime minister on Tuesday evening should help improve the fortunes of India Inc and these sectors. The quantum of its effect will be known once the specifics are announced.

Consumer durables, FMCG & Paints

The Covid-19-triggered disruption has spared none, not even the FMCG sector, which is perceived to be a safe haven. Though a couple of firms have faced less pain because of a bigger share of essential product sales, almost every company has been weighed down by production cuts and the supply-chain disruption. A change in demand pattern favouring food, hygiene, and health products has also been a disruptor.

 

While pure discretionary companies in the paints, adhesives, and consumer durables segments are more affected, dismal volumes in the March quarter reported by Hindustan Unilever (HUL; a 7 per cent decline) and Marico (a 3 per cent fall) show how widespread the problem is. Vishal Gutka, vice president at Phillip Capital, said HUL’s worse-than-expected performance has accumulated concern about the Q4 performance of the entire FMCG universe.

Indications are that business loss will be significantly bigger in the April-June quarter, which typically contributes 25-28 per cent to the annual revenue. Edelweiss, thus, has cut its FY21 top-line estimates by up to 11 per cent and earnings by 16 per cent for consumer staple companies.

At the current juncture, a recovery is expected in the festive season, but a lot will depend on customers’ approach, given lower disposable incomes. 

The makers of consumer durables, paints, and other discretionary products are likely to see a delayed recovery. For air-conditioner makers, their peak season sales have been lost. Axis Securities had estimated around 50 per cent earnings compression in FY21 for consumer durable companies. All these estimates should change depending on the quantum of incentives offered to consumers and companies.

Shreepad S Aute

Media and entertainment

The sharp sales deacceleration across various sectors after the Covid-19 outbreak could lead to a drop in advertising budgets, especially in sectors, such as fast-moving consumer goods which accounts for half the advertising spends on television. This, coupled with a gradual shift to digital advertising, is hurting broadcasters, such as Sun TV and Zee Entertainment. Higher programming costs at a time of falling revenues could also impact profitability. 

 

Subscriber revenues, too, could be hit if new tariff order NTO 2.0, with a shift to à la carte pricing and a lower cap on the maximum retail price, is implemented. The worst-case scenario, according to Elara Securities, pegs an advertising revenue decline of 40 per cent and subscription growth of just 3 per cent.

Given the initial lockdown and its extension in May, the June quarter could become a near washout, even if theatres gradually reopen because the social distancing norms will translate into lower occupancies. Higher fixed costs amid muted occupancies are expected to impact the profitability of PVR and Inox. While analysts are positive on the prospects of the two players, the near term could see them report operational losses in the June quarter. The sector could see a revival in the December quarter, which is the peak season backed by good content. 

Unless footfall recovers to the pre-Covid levels aided by the income-boosting measures and specific steps taken for the two sectors, the road ahead will be tough.

Ram Prasad Sahu

EPS is earnings per share; Source: Bloomberg, analyst reports; Compiled by BS Research Bureau