Coronavirus has claimed nearly 2,000 lives, and more than 70,000 are infected across the globe. This has left the investors on the back foot. The world is still coming to terms with the rising number of deaths from Covid-19.
But, the disruption is already happening globally as well as domestically in market. On the global front, Apple flagged lower revenue guidance as a result of the epidemic for the March quarter because of slower iPhone production and weaker demand in China.
The slowdown in China will have a ripple effect across the globe, and to a certain extent equity markets are factoring that in. Crude oil prices have already cooled off from highs, Nifty50 (which hit a record high in January) is down by over 400 points from its record high of 12,400, and has wiped out gains made so far in 2020.
It is clear that the impact of Covid-19 could be larger than the SARS scare in 2002-03. Hence, the saying “with china sneezing, the world is catching a cold”, holds true.
Experts are of the view that supply disruptions due to travel ban, global commodity price movements, levels of inventory, etc. are factors that will impact companies from India Inc.
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The global brokerage firm, Citigroup is of the view that markets are overconfident in expecting a V-shaped recovery. It is more likely that we will see a longer U-shaped recovery in real.
“There are many reasons to believe that a v-shaped recovery is in the works inventories will weigh on commodity prices for longer than it’s assumed,” it said.
The flu-like ailment adds to worries over the growth of the interconnected global economy as a slowdown in China will have ripple effects across the globe, suggest experts.
“The supply shock from factory shutdowns in the country is already affecting many industries and is threatening to disrupt global supply chains. As the virus shows signs of spreading beyond China; this adds further uncertainty as everyone waits to see how the pandemic evolves,” Chirag Mehta - Senior Fund Manager - Alternative Investments, Quantum Mutual Fund said.
“Markets are already pricing in a slowdown as a prolonged deterioration in the conditions increases the odds of a global market downturn in 2020. Equities are expected to remain volatile as they react to conflicting forces of central bank injected cheap liquidity and weak economic fundamentals,” he said.
Emkay Global outlines stocks that are likely to get negatively impacted by the Coronavirus outbreak:
The share of China in imports of the consumer durables industry is high (up to 90% of compressors, a large share of PCBs, etc.), with negligible alternatives.
Peak summer sales could be at risk if the supply disruption persists beyond February. Chemicals/agro-chem companies with weak backward integration appear vulnerable Dhanuka/Rallis/Vinati/Camlin.
Steel and aluminium companies could be at risk from a slowdown in demand and cooling-off of prices. In the auto space, Tata Motors and (to a smaller extent) Motherson could be hit. ONGC/OIL’s earnings could get hit by weak crude prices.
China forms around 5 percent of India’s export and 13 percent of India’s imports. We do not believe that there would be a structural shift in the trade deficit which has jumped by nearly 2.3x in the last decade.However, Emkay is of the view that there might be some impact on consumption-oriented exports. Organic chemicals, plastic (raw materials), cotton yarn, iron ore, and marine products form a large part of exports to China.
Dhanuka Agritech has a raw material inventory of 30-45 days and has low direct exposure to China. However, we believe that any major increase would be passed on to the consumers.
Rallis India has raw material inventory of 30-40 days and hence any disruption of one month can be handled easily. Since Rallis derives maximum revenue from Q1 and Q2, it would have a higher impact.Vinati Organics Ltd:
Vinati Organics has a unique business model and a leading position. The company is the largest manufacturer of specialty chemicals. China plays a vital role in chemical space for the world. It is the largest producer and consumer of chemicals (~50%) in the world.
Vinati has a unique integrated business model and operates throughout the value chain. It is the only fully backward-integrated company in the ATBS value chain. (ATBS is used in enhanced oil recovery and water treatment.).
Camlin Fine also belongs to the Specialty Chemical space. There is a 5 percent impact on sales if the raw material prices are raised by 10 percent, according to Emkay Global stress analysis. Camlin Fine could get impacted by 31 percent on the cost front.
In the near term, the Covid-19 outbreak could negatively affect China region revenues of Tata Motors (~11% of consolidated revenues). Tata Motors derives about 11 percent of its consolidated revenues from the China region (on a pro-rata basis) through JLR's exports and the Cherry JV.
JLR's China JV's plant is situated at Changshu, China, which is away from the epicenter of the Covid-19 outbreak (Wuhan). Assuming China volumes are impacted by 25 percent in the near term, consolidated EBITDA estimates could reduce by 6 percent and 5 percent in Q4FY20 and Q1FY21, respectively.
In the near term, the Covid-19 outbreak could negatively affect China region revenues of Motherson Sumi. It derives about 6 percent of consolidated revenues from the China region. Assuming China sales to be impacted by 25 percent in the near term, consolidated EBITDA estimates could reduce by 3 percent.
Emeka is of the view that lower oil prices would dent the earnings of companies. Being the second-largest oil consumer, China is a major player in the energy markets. It is also the world’s fifth-biggest oil producer, a largest oil importer, second-biggest refiner, third-largest gas consumer, sixth-biggest gas producer, and second-biggest LNG importer.
Globally, China accounts for 14 percent of oil demand, 15 percent of oil imports, 15 percent of refining volumes, 7 percent of gas consumption, and 17 percent of LNG imports.
While near-term movement in oil prices, GRMs, and spot LNG would be volatile depending on the situation, Emkay Global said in a report. If the epidemic extends or becomes more severe, then the impact would be elongated and will affect the annual averages further and vice versa.Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.