An imminent crash in the Indian stock market since the onset of the Covid-19 pandemic has been on the minds of all investors. With the Sensex and Nifty 50 indices posting a bi-annual return of about -22% till the end of May 2020, there is a lot of uncertainty over what the future entails. This economic crisis brought on by Covid-19 has had an effect on almost all industries in the form of disrupted supply chains, subdued demand, and halt in manufacturing but in a varied manner.
Till now, the shares of most companies operating in sectors such as Oil & Gas (O&G), Cement and Automobiles have seen a significant fall in prices in the past few months. The Nifty Energy and Nifty Auto indices posted -21% and -25% six-monthly returns, respectively, till May 29th 2020. However, the prices of stocks in the FMCG sector saw a lesser fall – with the Nifty FMCG registering only -9% six-monthly return till May end. Further, many companies in the pharmaceuticals space even saw some growth with the Nifty Pharma posting about 14% returns for the same period. Given that the crisis is not expected to end soon as the countries across the globe continue to battle with the virus and bring it under control, it becomes important for investors to assess which sectors can emerge stronger than the others or post quicker recovery in the near future.
The O&G sector has been witnessing a big dip in demand with all forms of transportation and industrial activities being restricted due to the virus. With excess supply, this has led to issues with storage space in the sector. The extent of this issue is such that the crude oil prices have been spiralling down, even going negative. On April 20th, the West Texas Intermediate (WTI) crude oil futures traded at -$37.6 per barrel – a scenario where sellers were paying buyers to take the inventory from them as the cost of storage became more than the economic value of the commodity. This was an unimaginable situation and shows how inflated the prices of oil are kept by the OPEC block. Largely driven by demand and highly regulated supplies, oil may not remain a coveted commodity in future if the rest of the world can negotiate their positions carefully. The EV revolution can also suppress some of the oil demand. However, an important sector in each country that cannot reduce oil dependency and is one of the largest users of oil is the armed forces. For strategic reasons, the oil dependency cannot be largely substituted by EV’s or other technologies in this sector. The armed forces remain one of the biggest consumers of oil in any country. India generally trades oil in a different basket which is the average of Oman, Dubai and Brent crude.
As air travel resumes and commercial activities pick up slowly, the oil consumption is expected to increase gradually, however, it will take some time to return to pre-coronavirus levels. Additionally, Indian oil companies in the upstream space may have to clear their inventory at low prices given the global decline.
The weak demand and supply chain challenges have also been impacting the cement sector in India. The stock prices of leading companies such as UltraTech Cement, Ambuja Cement, Heidelberg Cement and Birla Corp declined 10-20% in the past six months till the end of May.
A reduction in consumer discretionary spending and Capex by corporates is expected to keep the demand for cement subdued in the near future. Event the government construction expenditure is likely to reduce this fiscal as funds are directed towards healthcare. The movement of migrants is also likely to effect in ramp-up of the construction work. However, one positive thing for the sector is a reduction in production costs as the prices of pet coke, a major input for cement, are decreasing due to crude oil prices.
Companies in the Automobile sector have also been facing their set of issues. Given the nature of the industry, the supply chain relationships are more complex, thus affecting the speed of a likely recovery. The demand is estimated to remain low with an increase in unemployment and pay cuts that drive consumer focus towards essential products and services at least for the next six to twelve months. Mr. Shyamsunder Bhat, CIO at Exide Life Insurance, said “within consumer discretionary, sales of the big-ticket items like cars will recover last. There is a school of thought that two-wheelers may see some initial demand, as people will be worried about public transport.”
The launch and production of Electric Vehicles (EVs) are expected to be delayed as the companies focus to recover their investments made to comply with Bharat Stage VI (BS-VI) emission norms. Only vehicles that fulfil the criteria under these norms can be sold by the manufacturers from April 10, 2020. Further, the government’s regulatory push towards EVs is also expected to reduce in the near future as policies focus more on public health and welfare. The manufacturers are likely to focus on their core products and push the EV plans to next fiscal.
The FMCG and Pharma sectors provide some light in the otherwise dim market. The FMCG industry has faced lesser challenges due to Covid-19 as consumer spending is getting directed to necessity-driven goods. While demand exists, the breakdown of supply chain and sales mode shifting towards online contactless purchases are affecting supply. The companies need to invest in strengthening last-mile delivery partnerships – that will become one of the key success factors in recovery. Indian pharma companies have benefitted after the pandemic as demand for drugs has skyrocketed not just in India but globally. This has also boosted exports supported by weakening of rupee against the dollar. Further, USFDA (US Food and Drug Administration) recently gave quick approvals for asthma medicines produced by Indian companies – thus pushing up the stock prices. Supply-side challenges have also reduced as imports of key starting material (KSMs) from China resume – essential to the drug production in India.
The inherent shortcomings of the supply sector in India can be somewhat repaired with the help of blockchain technologies. Some companies such as Vechain are already using blockchain technology leveraged through cryptocurrency to iron out the deficiencies of the supply sector. A new emerging field of blockchain powered solutions may also soon emerge in India. This may also provide some unique and challenging investment opportunities.
However, amidst the current volatility and subdued sentiments, companies with adequate financial strength and ability to bear the shortfall in demand are expected to do better than the others. Till the economy improves, it is better to stick to investing in evergreen sectors like FMCG that are typically defensive, and leverage opportunities presented by the pharma sector.
Other infrastructure bets such as electricity driven solutions or renewable energy companies may also see some recovery as these are considered essential services and were not stopped even during the lockdown.
 Bharat stage emission norms are mandates from the government on the quantum of air pollutants from the internal combustion engines of the vehicles