Aftermath of COVID-19: Which sectors will struggle, which won’t

As growth figures sink to an all-time low, questions arise over what lies ahead for the various sectors.

Aftermath of COVID-19: Which sectors will struggle, which won’t

The official figures are out finally: India grew at an insipid 4.2% in 2019–20. As a footnote, the last quarter’s growth rates have also been scaled down. And while the numbers – India’s quarterly and annual growth rates – are more than what rating agencies and various economists earlier estimated, there was a caveat: these could be revised further. 

This is because these were based on available data, which were not complete on account of disruption of activity occasioned by the lockdown, the government said, while releasing the economic data on March 29. A more accurate picture will emerge once data flow from the relevant economic entities normalises.

January–April 2020

The numbers reflect the prolonged economic slowdown India was grappling with even before COVID-19 began surging in the last week of February – the growth rate of eight core industries slid 9% in March when compared with the previous month. 

But as events showed, the lockdown declared in March dealt an even harder blow, which, according to HSBC’s Chief India Economist Pranjul Bhandari, would have erased the gains of January and February. As per the official data, the growth rate of these same eight core industries for April fell even more steeply – by more than 38%, as seen below:

  • Cement: 86%
  • Steel: 84%
  • Refinery: 24.2%
  • Electricity: 22.8%
  • Coal: 15.5%
  • Crude: 6.4%
  • Fertiliser: 4.5%  

The plunge in output for cement and steel tell the story of the real estate sector – an indication of liquidity with both companies and individuals. Yet, economic activities were showing signs of traction in early 2020 before the virus struck, and there are reasons to believe certain sectors will revive once the lockdown ends. But, admittedly, others will stagnate for some time. 

Related: How to prepare yourself financially during a pandemic

Let us see what can go up, and what won’t.

Year-end ups

A few of the sectors that are likely to shine by the fiscal-end are fintech companies, e-commerce, logistics, pharma, and auto. The ones that in all likelihood will struggle will be discussed later. 

  • E-commerce

In a March 2020 report, the India Brand Equity Foundation estimated the e-commerce sector in the country to grow into a $200-billion market by 2026 from the current $38.5 billion. 

London-based data analytics firm GlobalData is even more optimistic – and that is simply because of the pandemic. “The COVID-19 outbreak will have greater implications on Indian consumers’ buying behaviour pushing them to embrace e-commerce,” it says. As a result, it believes COVID-19 and the lockdown is pushing e-commerce sector to a market size of ₹7 trillion by 2023, registering a CAGR of 19.6% between 2019 and 2023.

GlobalData says that consumers are preferring to stay at home and rely on online channels. Online spending during the current lockdown is rising, partially offsetting the overall decline in consumer spending. E-commerce companies such as Amazon, Grofers, Big Basket, Flipkart, Paytm, Zomato, Swiggy, and Netflix are likely to flourish as people avoid crowds till an effective vaccine is found for COVID-19.

  • Fintech

A joint CII-Deloitte report titled Banking on the Future: Vision 2020 pointed out that the ‘unprecedented growth’ in India’s fintech sector was driven by more than over a billion mobile phones, 330 million internet users, and 240 million smart phones.

After COVID-19, the growth can only be pushed further; with the expansion of e-commerce, it will become critical for customers to be able to pay digitally, considering that many online marketers will shun brick-and-mortar stores to avoid exposure to disease terminals. In fact, GlobalData says online buying could increase by almost 26% in 2020 itself. 

A statement from SBI Cards and Payments Services seems to point to this happening already: the average daily spends were upwards of Rs 175 crore during May. “Spends on credit cards continued during lockdown through online and merchant outlets open during this period,” it said.

Some estimates give an indication as to what this really implies: online payment, now comprising less than 10% of personal consumption expenditure, will constitute more than 25% in the next 12 months, and touch 50% in the next 3–4years. The payments that these e-commerce companies will make to thousands of vendors will also go digital.

As more and more consumers get comfortable with digital payments, even banks, financial institutions and state utilities like power and gas companies will be increasingly handling payments digitally. Fintech and payment companies that support these solutions will likely see enormous growth in addition to these e-commerce companies.

  • Logistics

This is one area that experts feel is bound to get a push from the government after the pandemic (at least warehousing and technology firms) as it tries to pick up the threads of exports.

Before the lockdown was lifted partially on June 1, the protracted shutdown stretching over 60 days saw factories ceasing production of non-essential goods, delivery consignments being stuck midway or in warehouses, and workers heading home by whatever modes they could.

With production and freight movement stopping, the logistics sector was hit hard; according to credit rating agency ICRA, it would probably witness a fall of 6–8% by the fiscal-end. ICRA also expects the trend to continue in the fourth quarter of FY2020 and the first quarter of the current fiscal as well.

Hopefully, the government will now accord priority to the National Logistics Policy, which envisages a Rs 100 lakh crore outlay for a National Infrastructure Pipeline straddling more than 6500 infrastructure projects. 

Related: All about the housing and export-related measures announced by the Finance Minister

  • Pharma

India’s pharmaceuticals market has two unique characteristics: first, its branded generics make up 70-80%; second, intense competition and a state-regulated pricing policy have kept price levels low.

Pharma companies have to buy bulk drugs and sell their final products at rates fixed by the government, which leaves wafer-thin profit margins. And the list of price-controlled drugs is only increasing – having risen from 74 in 1995 to nearly 860 in 2019. What this means is that, globally, India ranks  third in terms of volumes but tenth in terms of value. 

The last few months of 2019 has been especially bad, with the cost of raw material imports from China seeing a 50% increase. But there’s a silver lining: India is the world’s largest supplier of generic drugs, controlling around 18% of the global market. What’s more, it caters to about 50% of the world’s vaccine demand. 

Before the pandemic began raging in India by the end of February, ICRA had forecast the domestic pharma sector retaining a growth rate of 10–13% in FY2021 because of local demand. Alongside, pricing pressure for the US market has also abated.

The future beyond 2021 is also rosy, ICRA has argued: approximately $62 billion worth of small molecules are expected to go off-patent, resulting in the overall generics market in the US growing at a CAGR of 5.6% till 2022.

  • Two-wheelers

The outlook for India’s automotive sector is dull for the first half of the next financial year, say experts across the board. As per ICRA, things look stable for two-wheelers – even as the passenger car, commercial vehicles, and tractor segments will see a contraction.

According to ICRA, the outlook for two-wheeler OEMs is stable for next 12–18 months. This is despite the ongoing slowdown in that segment and the unsettlement that could be caused by the transition to BS-VI standards. ICRA’s forecast rides on the back of expectations that the credit profile of two-wheeler OEMs will continue to remain strong despite a moderation in earnings.

Furthermore, the demand weakness in the domestic market has been partially offset by healthy growth in exports, which were up 6.5% in the first eight months of FY 2020.

Related: 4 Things you didn’t know about your two-wheeler insurance

Year-end downs

Most sectors will struggle, in all likelihood, and some of the key ones are auto (passenger cars, commercial vehicles, and tractors), NBFCs, steel, real estate, and hospitality.

  • NBFCs

The sector that will be one of the hardest hit by the multi-phase lockdown will be NBFCs, with the extent of the impact depending on asset class, customer’s income, level of field work in the NBFC’s operations, and the proportion of cash collections.

Of the segments that NBFCs cater to, credit rating agency CRISIL says the lockdown will have maximum impact on the microfinance segment, as repayment will fall with the income generation activities of borrowers being disrupted.

Similarly, affordable housing loans could also feel the impact as it’s the self-employed (whose income streams have been affected by the lockdown) that comprise the bulk of borrowers. In a similar vein, repayment of commercial vehicle loans will be hurt because of weak earnings by fleet operators.

  • Passenger cars

Demand in the auto industry in general has come under pressure over last few quarters due to multiple factors such as liquidity crunch, a squeeze on financing, weak rural income, and the overall slowdown in economic activity that impacted buyer sentiments on the eve of the pandemic, leading to lukewarm retail demand. 

As a result, ICRA’s outlook for the passenger vehicle sector over the next 18 months is negative. In fact, as per industry estimates, the showroom sales of passenger vehicles in May stood at 37,000 – a year-on-year decline of 85%. Production and dispatches had come to a complete halt the preceding month due to the lockdown.

Now ICRA expects all these factors to work to exert pressure on the earnings and overall credit profile of passenger vehicle OEMs. At a seminar on the auto sector organised by the Economic Times recently, industry experts similarly opined that the real growth would not be seen before 2021.

The demand for smaller cars, however, is expected to increase as people would now be hesitant to use public transport in an attempt to maintain social distancing. The lower interest rates on car loans would also further facilitate this demand. 

  • Real estate

Another sector due for a big nosedive is the real estate sector. It had already received a serious setback in the first quarter of 2020, and going by the Ficci-Naredco Real Estate Sentiment Index, industry mood is at an all-time low.

Other findings corroborate this. According to an in-house survey by real estate platform 99 acres, 53% of homebuyers have deferred home buying decisions indefinitely. Additionally, about 74% of the brokers who participated in the survey are now quoting scaled-down prices for their offerings.

A JLL survey points to the reason: developers are saddled with an unsold inventory of 6.24 lakh units, with a total value of around Rs 3,70,000 crore, scattered around the top eight metro cities.

Related: Confused in Real Estate Investment ? Here are 6 myths you can stop worrying about

  • Steel

The economic slowdown preceding the pandemic (and the pandemic itself) has hit the steel sector, forcing ratings agency Ind-Ra (India Ratings and Research) to revise its outlook on the industry to negative for FY2021. It had been stable-to-negative earlier.

Apart from the modest demand, growth would also be hit by margin pressures led by iron ore price risks. “Any significant pick-up is unlikely,” the agency said. It also expects the overall steel margins to fall 30% year-on-year in FY2020, and in fact bottoming out in the fourth quarter, and remaining modest in FY2021. 

In case the demand does not strengthen by the second half of FY2021, it says new capacity additions could put further pressure on prices and capacity utilisation rates.

  • Hospitality

The pandemic has crippled the hospitality industry the world over. Sectoral consultancy HVS Global Services says it’s undoubtedly one of the biggest casualties, with demand sliding to an all-time low. 

Global travel advisories and travel bans within the country have meant that foreign tourist arrivals (FTAs) – especially leisure travellers – had started softening in February, and HVS says demand from this segment “is not expected to pick up any time soon”.

This was because the bulk of bookings for the winter season (October–March) – the “strong season for our industry” – are done in the summer months, which have been paralysed by the lockdown. “The paranoia surrounding the events will continue to have a major impact on travel,” HVS said in a report on India’s hotel and hospitality sector. Take a look at these 4 ideal investment sectors that may continue to deliver decent returns over medium-to-long term.  


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