Post-Covid recovery will be uneven

If the pandemic were to prolong, or if the monsoon is below normal, rural incomes will be impacted, and demand recovery will be slow.

The second wave of Covid-19 has hit hard and deep, causing immense pain. However, its impact on the credit profiles of, and the outlook for, domestic companies has been relatively milder compared with the situation a year back. There are four crucial differences this time around.
 
One, disruption in business activity is relatively less because lockdowns have been asynchronous in states and even districts, and less stringent. Two, the availability of clear treatment protocols has brought down the mortality rate, despite a sharper rise and a taller affliction peak. That there are effective vaccines — leaving aside the availability challenges in India — is reassuring for recovery in demand.

 
Three, leaner costs, focus on liquidity and adjustments to operating models have made companies better-prepared this time around. A CRISIL Ratings analysis of quarterly revenue growth and profitability reveals that larger corporates have a considerable advantage over their smaller peers, due to professional management and better access to resources.
 

Four, many sectors are showing resilience. A CRISIL Ratings study of 43 sectors (accounting for 75 per cent of the Rs 36-trillion rated debt, excluding the financial sector) indicates that 28 of them (85 per cent of corporate debt) will see demand recover fully this fiscal, while six will recover to 85-100 per cent of the pre-pandemic level. With the world economy in recovery mode, export-oriented sectors are already seeing a revival.

 
On the flip side, 13 sectors, with Rs 3.6 trillion in debt, have borne the brunt of the second wave. There is a steep decline in their recovery potential. These include nine sectors where recovery seems distant (below 85 per cent of last-fiscal levels) and will spill over to the next fiscal. The vulnerable 13 comprise contact-intensive sectors such as hospitality, retail, airlines and airport operators, as well as sectors with discretionary demand such as automobiles (passenger vehicles and two-wheelers), and gems and jewellery.
 
Not surprisingly, the recent expansion of the Emergency Credit Line Guarantee Scheme (ECLGS) includes some of these 13 vulnerable sectors and eases the credit eligibility for a few others, whereas the Resolution Framework 2.0 announced by the Reserve Bank of India focused on smaller businesses.

 
Overall, the outlook on the credit profiles of India Inc is supported by expected recovery in demand as the second wave ebbs, amid improving capital structures. A secular deleveraging trend — median gearing for the CRISIL Ratings portfolio declined to 0.9 times in 2020, from 1.3 times five years ago — implies that India Inc has greater balance-sheet strength for exigencies as well as to leverage when the private capex cycle revives. The financial sector is also better-placed today than a year ago. Less stringent lockdowns apart, the systems and processes put in place to manage collections amid restrictions have helped.

 
Regulatory measures such as the loan-servicing moratorium, one-time restructuring and ECLGS introduced so far to support companies have, in turn, helped banks and non-banks contain their nonperforming assets and credit profiles. Collections across personal, small business and micro, small and medium enterprise (MSME) segments will bear watching.
 
We expect upgrades to outnumber downgrades this year. In comparison, the CRISIL Ratings credit ratio (upgrades to downgrades) last fiscal was 0.98, with a sharp difference between the first (0.54 times) and second half (1.33) because economic activity rebounded later.
 
If the pandemic were to prolong, or if the monsoon turns out below normal, or both, there will be a material impact on rural incomes, leading to slower-than-expected demand recovery. Small businesses, in particular, will be more vulnerable to slack demand. Some cautious optimism would not be out of place, however. Because, this time around, India Inc is perched on higher and firmer ground, amid the lashing waves.

 
The writer is Managing Director, CRISIL Ratings