Moody's Investors Service on Monday said if the second wave of the pandemic does not decline to more manageable levels and results in a prolonged and wider lockdowns, it will have a more severe effect on companies' earnings recovery.
It said the resurgence of coronavirus infections in India that has led to regional lockdowns will put the brakes on rated companies' earnings recovery seen in recent months.
Earnings have seen a rising trend since October 2020 following the easing of national and state-level lockdowns. But renewed restrictions in many states will weaken demand for goods and services, and disrupt the recent recovery trajectory.
"India's largely regional and less stringent lockdowns amid the second wave of coronavirus cases so far have had a limited impact on economic activity. If infections fail to decline to more manageable levels, however, lockdowns may be prolonged and widen, which will have a more severe effect on companies' earnings recovery," Moody's said in a report.
It expects the negative impact on economic activity to be limited to June quarter, and that the economy will rebound in the second half of the year. However, if infections fail to decline to more manageable levels, lockdowns may be prolonged and increase in scope.
This situation would severely weaken rated companies' earnings and derail the recovery seen over the last six months, it added.
"Another nationwide lockdown would have severe disruptions for the whole country, compared with the more contained, state-level restrictions in effect now. A national lockdown scenario would restrict personal mobility on a large scale, lower demand for goods and services, as well as lead to supply-chain disruptions and aggravate labour shortages," Moody's said.
Widespread movement restrictions will lower demand for transportation fuel and reduce the capacity utilization for oil refiners. Similarly, demand will decline in sectors such as automobiles and real estate as consumers postpone their purchases amid limitations on movement.
Lower domestic demand in end-user industries will also reduce capacity utilization for heavy industries like steel, cement, and metals and mining.
Long and widespread lockdowns, if imposed, would dampen consumer sentiment and weaken demand for goods and services in general. Consumers will likely defer nonessential purchases, which will lower economic activity in the country.
"A scenario of stringent lockdowns would result in blue-collared workers moving back to their hometowns and manufacturing activity likely coming to a halt. This situation would lead to labour shortages once lockdowns are eased and manufacturing activity resumes.
"As a result, capacity utilization would remain weak even in the immediate weeks and months after lockdowns are eased," Moody's added.