Reality check

The perils of seasonality of products, broad-based portfolio and balancing cost-cutting with resources-raising

The Q4 performance and commentary offer glimpses of how Indian companies are viewing the road ahead, post the five-phase 75-day lockdown that began on 25 March to contain the covid-19 outbreak and started unwinding from 8 June. Most have claimed that their latest numbers would have been much superior but for the loss of the last 10 days, partially erasing the January and February growth. Hit the hardest were those whose seasonality peaked in summer as they stared at a loss stretching for the entire year and not just H1. A maker of temperature-control equipment ended in red.  A jeweller’s revenues dipped in single digit after recording a double-digit growth in the first two months. Banks and financial services providers suffered a setback as they had to make Reserve Bank of India-directed provisions in anticipation of covid-19-induced defaults.  The demand for tractors following a bountiful rabi crop stumbled.  Supply of housing-related products, whose consumption accelerates in the run-up to the southwest monsoon, slumped. Tour operators gearing up for the holiday season are reckoning a year-long break in cash inflow. An FMCG player bemoaned stockists were unable to store up on soaps at the year-end as is the usual practice. The downside of investing in businesses whose revenues are bunched over a small period rather than spread out throughout the 12 months is an important risk-aversion lesson from the current crisis.

Another outcome is the awareness of segment revenues. A portfolio catering to all price points as well as to different categories of its market has become a burden to carry for several companies rather than a winning strategy to de-risk. Generics exports contributed to pharmaceutical producers’ bumper numbers as domestic margins got bogged down by price caps. Insecticide sales of chemicals makers surged in anticipation of a normal rains but not inputs for use in industries contending with broken supply and distribution chains. The government advisory to prefer open ventilation to avoid infection propelled air-coolers.Air-conditioners requiring installation got a cool reception. Health, hygiene and nutritional brands flew off the shelves, with discretionary categories such as hair care, skin care and color cosmetics watching forlornly. Cars, two-wheelers and farm vehicles raced past trucks. Niche players riding on recovery will likely outperform their sector. Those with a broad-based basket of products are struggling to achieve optimum output due to the uneven contribution of different streams. Several are facing losses arising from depreciation in the value of inventories stocked in anticipation of India returning to growth, as captured by manufacturing and services indicators and GST collections in the first couple of months of the New Year. Another noticeable trend is the wholehearted embracing of the digital space to push volumes and profitability.Connecting offline grocers with their community through Whatsapp chats showcases how the method of attracting buyers is set for a transformation. Tie-ups are being pursued with those specializing in last-mile delivery such as food and taxi aggregators.   

When confronted with unexpected emergencies that disturb consumption patterns, the usual reaction is to hunker down by cutting on capital expenditure. Many manufacturing and services activities began partial operations in the second phase of the lockout in April and scaled up output in May. The eagerness to achieve normalcy, though at odds with the intention of rationalizing cost, is understandable as, unlike cyclical booms and busts that recur periodically, there is no clarity on the expiry date of the present medical emergency. A worry for investors should be how prepared will be enterprises obsessed with preserving cash when there is return of buoyancy. Besides, the market is finicky about how assets are deployed for growth.  High liquidity and low market value due to poor earnings visibility is a trap that is difficult to get out of. One more response, of rushing to raise funds by issuing shares or placing debt, is at once comforting and concerning. Dilution of the equity base scales down earnings per share. A portion of the operating profit has to be diverted for repayment of leverage. That there is confidence of servicing the additional burden through growth indicates optimism. Strangely, some of the companies are refraining from giving even the next quarter’s guidance because of the uncertain outlook. When existing capacities are not being utilized fully, the exercise looks building of a bridge to manage fixed costs till the tide turns.

-Mohan Sule