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It’s only after we have vaccinated enough to attain herd immunity that we can sigh in relief and investors can strike the pandemic off as a major risk. For now, the second wave’s effect on the economy is becoming increasingly apparent. Many states have announced restrictions that limit physical mobility and are allowing sale of only a few goods essential to life—such as medicines and groceries. Even e-commerce companies have been prohibited from selling anything other than essential items in some states.
The Economic Recovery Tracker’s latest update shows the weekly data in a sea of red. Car dealerships are shut, and even if they weren’t, consumer demand for big-ticket items will be subdued in this environment. It’s no surprise that automobile registrations showed a sharp dip in sequential terms. Mobility has been a big casualty of these localised lockdowns as people are forced to stay indoors and even going out buying grocery and medicines has dropped sharply. A declining trend in power consumption shows the broader effect of the dip in economic activity.
Sure, March quarter earnings show the good times that were prevailing just a few months ago. But the next few quarters will show how companies have tackled these difficult times and how it has affected their performance. Sectors that are dependent on consumers being able to go out and shop or on people going to office and travelling for work or leisure will be affected more.
Companies are allowed to run their factories, but who will they sell to, if they are not making essential products? They can produce to stock, but how much? Their supply chain too may not have the capacity to hold pipeline inventory beyond a level. The business to consumer supply lines have been hit the hardest.
But some companies are in a better place. Take industries making commodities, for example. They were already in a good place, first, from a surge in commodity prices across the board and, second, from a surge in demand globally—and even in India till recently. Domestic demand for their products has not disappeared, as industrial activity and infrastructure projects continue.
This applies to commodities ranging from cement, steel, non-ferrous metals and chemicals and even mined products such as iron ore. They can also export their products as global demand is recovering and trade supply chains have been restored, even if not fully.
Some of them may even decide to produce and stock for the domestic market, if they have the storage capacity and their raw material costs are low. A higher margin can give them the ability to bear the carrying cost of inventory and absorb the risk of an unexpected decline in the market price. A pent-up demand bounce will see them benefit.
But exports are likely to be the preferred market for commodity companies in the near term, except in sectors such as cement (not easily exported). The margins on exports are relatively lower compared to that of domestic sales, and margin expectations may have to be toned down a bit. But that is a far better situation than not having sales take place at all. Calling the sector defensive may seem a stretch, but it appears to have acquired some of those characteristics for now.
Investing insights from our top-notch research team
UltraTech – Power-packed numbers in Q4, wait for correction
L&T Infotech: Why we sense an opportunity in the current weakness
EIH: Is the quality hotel stock worth a look at this juncture?
Technical picks: Apollo Tyres, L&T, Cipla and IGL (These are published every trading day before the market opens and can be read on the app)
What else are we reading today?
COVID and the future of jobs in India
India and China have broken a 500-year jinx
What does the increasing number of retail investors mean for the market?Road construction firms will steer through blip in toll collections from second wave
Is leverage still the best benchmark of credit risk?
(republished from the FT)