Business

Demand, supply chain disruption may see pvt manufacturing shrinking in FY21

Published

4 years ago

May 23, 2020

Demand, supply chain disruption may see pvt manufacturing shrinking in FY21

The Reserve Bank of India’s (RBI’s) estimate that India’s economic growth will decelerate in the first half of the current year is largely on the back of demand and supply chain disruptions in the manufacturing sector, especially in the private sector.Corporate sector growth, which has a share of over 75 per cent in manufacturing growth, would need a few more months to get back to normal production, provided demand picks up.

Analysts on engineering and capital goods, for instance, said revenue for the first quarter of FY21 would take a 20 to 50 per cent hit.

“It is difficult to make an estimate on how bad the hit for new orders will be as the quarter is yet to end. The impact on overall numbers will, however, be negative though the extent of it will depend on how long this lockdown continues,” said an analyst with a domestic brokerage firm.

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Bharat Giani, analyst at brokerage Sharekhan, expects automobile sales in FY21 to post double-digit decline, owing to issues on both production and supply sides. After 40 days of shutdown, automobile companies have resumed production at their facilities. For the first time ever, auto companies reported almost zero sales in April. “Most of them will not be able to get to the peak capacities anytime soon and are operating at 30 to 40 per cent levels,” Giani said.

Car market leader Maruti Suzuki India is cautious, too. In response to an analyst question during a post earnings investor call, Shashank Srivastava, executive director at the company, said, “It is difficult to give a forward guidance of when the market will pick up. Car buying is a discretionary purchase. It depends a lot on sentiment. And sentiments can be very transient,” he said. In the cement sector, where a recovery was expected faster than others because of early start of infrastructure construction activity, the situation is no different with revenue and production both likely to take a hit.

“All cement companies have started their plants and are now ready to supply according to the requirement. Demand from the road sector in Karnataka and eastern India has improved. However, there are a number of challenges for demand from urban and large centres,” said Mahendra Singhi, managing director (MD) and chief executive officer (CEO) at Dalmia Cement and president of the Cement Manufacturers Association. The present cement industry demand is 40 to 50 per cent of what it used to be.

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Sales volumes at UltraTech Cement may come under pressure in FY21 due to an expected slowdown in infrastructure projects and housing demand, said Emkay Global Financial Services, in a post-results report of the company.

UltraTech told analysts that the company started FY21 with higher inventories and despatches are continuously going up after resumption of operations in the third week of April.

Currently, cement demand is coming from retail, rural market and some of the National highway projects where work has resumed with a view to complete them before monsoon.

According to analysts at Narnolia Financial Advisors, the management, in an earnings call, said construction activity and demand will slow down for the next two-three months due to labour constraint. Nilesh Narwekar, CEO, JSW Cement, said,

“There is demand coming from infrastructure spending. So, we are seeing signs of demand no doubt, but for the cement industry, the peak demand season is the pre-monsoon period, which is March-May. We may see contraction compared to the same period last year.”

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From April, when the company had to shut down its plant completely, it is improving. “Our utilisations were at 20 per cent in April-end, and currently in May, we are at 45 per cent. So, we are in better position, said Narwekar. He said though it was looking at local hiring of labour, these changes take time to come. So, there will be an impact on business. JSW Cement has a current capacity of 14 million tonnes and it plans to reach 25 million tonnes by FY23.

Rating agency CRISIL, which in a March report, anticipated 5-6 per cent volume growth for the cement sector in FY21 from 0.5-1 per cent estimated for FY20, changed its outlook in its May 18 report. It said respondents to a cement dealer survey said they expect volumes to shrink 10-30 per cent in FY21 in the base case scenario.

The steel sector, which is linked to revival of construction activity like cement, is also banking on infrastructure push but demand is seeing only a gradual pick up. JSW Steel, which has 18 million tonnes of consolidated capacity, said it was making efforts to gradually ramp up capacity utilisation. However, domestic demand outlook is expected to remain subdued in the near term as a vast majority of customers across automotive, construction, engineering and capital goods will also take time to resume operations and increase activity levels.

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Specialised steel demand, which is a new area for Indian steel makers, could be impacted because of continued battering of the automobile sector. A broken supply chain, exodus of migrant workers and strict guidelines laid by the government amid the lockdown, are creating bottlenecks in production, said officials at various auto companies. Despite the disruptions, Rakesh Sharma, executive director at Bajaj Auto remains optimistic. “We expect the positive forces to start playing out in the second half of the year and smart recovery to take place.”

For all manufacturing companies, cost-saving measures would be the key to profit improvement whenever demand recovers. CARE Ratings, in its commentary, said there was uncertainty regarding duration of the pandemic and thus, downside risks to the economic growth are significant.

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(Note: This is a Article Automatically Generated Through Syndication, Here is The Original Source

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