The Returns Amidst Covid-19, and the Risks Involved

As the coronavirus pandemic rages on, the world economy has been on a downward spiral, with many industries struggling to stay afloat due to cash flow issues. The world has now been forced to accept the changing norms and adopt new policies as part of the ‘new normal’.  Well established companies have been forced to come up with new HR policies so that they can change the way they operate. People have been asked to work from home whenever possible and firms are focussing more on how they can implement social distancing norms within their operational hubs. 

 

A mega-booster package to revive the economy had been announced by the Finance Minister last week. This package amounted to 10% of the total GDP of the country and aimed primarily at being supportive of MSMEs and benefitting the migrant labourers. Distressed Power Discoms have been allotted Rs. 90,000 crore relief funds and the due dates for ITR and tax audits have been extended. Private coal mining has now been allowed and the FDI in the defence sector has been increased from 49% to 70%. To promote ease of doing business in the country, labour laws have been relaxed for 3 years. This was a crucial step to curb the menace caused by the pandemic.

 

 

While this was an essential step taken to ensure liquidity for business operations, sectors like tourism and hospitality are still in distress. Since people won’t be willing to go out and dine, restaurants are going to have a tough time retaining the usual foodies. On the other hand, the pandemic has proved to be a boon for specific sectors like consumer goods and pharmaceuticals. Leading Asset Management Companies (AMCs) have shown confidence in these sectors and have been treating them as their new investment havens.

 

Let’s take a look at some sectors where COVID-19 has wreaked havoc. For our analysis, we would be focusing on firms that give an overview of how a particular sector has been performing as a whole. 

 

The tourism sector, for instance, may lose up to Rs. 5 lakh crore with job cuts of about 4-5 crore people. Branded hotels, tour operators and travel agencies may be the worst hit, with an estimated loss of Rs. 1.58 lakh crore. A total revenue loss of 60-70% is anticipated this year.

 

Let’s look at the example of Thomas Cook (India) and how it has performed in the stock market for the last year:

 

 

 

 

As can be seen from the risk and return analysis above, the stock has constantly seen a downward trend in the past year. The returns for the stock have dropped to -90% and the risk associated has risen from 8% to 21%. 

 

Things haven’t been going quite well for the automobile sector in India either. Already impacted by the global economic slowdown, it is now seeing a downward trend due to the pandemic as all manufacturing operations have been shut. China accounts for 27% of India’s automotive part imports and global auto part makers have factories located in several provinces of China. This has delayed the production and delivery of vehicles.

 

As can be seen from the stock market performance of Mahindra & Mahindra, which had been quite stable for almost a year, saw a slump in April 2020.

 

 

 

 

The returns have dropped to 57% and the risk has increased from 9% to 13%; again, a massive loss for investors.

 

But, here’s the surprising bit. With the lockdown 4.0 measures coming into effect and some restrictions being eased, the automobile sector has seen a spike in its sales. According to the CEO of Hero MotoCorp, 45% of the company’s dealerships have opened. Further, they had already retailed 50,000 units since May 4 when the government partially lifted the lockdown in certain areas. A high percentage of these sales come from their new line of BS6 motorcycles. So taking a long position on automobile stocks might pay off, considering that prices are low.

 

The consumer goods sector has been a favourite of the AMCs as it is likely to be among the ones that would be least impacted. Or perhaps, the impact may be seen when the virus recedes. Dabur’s stock grew steadily in the last year. It did see a drop sometime in March, but that was expected as a reaction to the sudden announcement of lockdown measures.

 

 

 

 

As can be seen from the graphs above, the stock has given 13% returns amidst a pandemic and the risk has halved from 8% to 4%. That’s quite encouraging as this becomes a good long-term investment option.

 

Finally, we’ll talk about a sector which has helped India gain recognition for medicines at the global level – the pharmaceutical sector. AMCs are looking forward to increasing investment in the pharma sector as this is one of the very few sectors which is operating proactively to get the nation out of the prevailing situation. Many companies in this sector are working towards a coronavirus vaccine and are also responsible for manufacturing Hydroxychloroquine (HCQ) in large quantities. These have been exported to countries like the USA, UK, and Afghanistan where demand soared.

 

Let’s take a look at how Cipla‘s stock performed in the last year:

 

 

Cipla’s stock has been dropping steadily over the past year. The slowdown just made it worse. It hit an all-time low somewhere in mid-March, which coincided with the announcement of the nation-wide lockdown. However, with the news of Cipla going for vaccine trials, the stock jumped 8% at the beginning of April. With the pharmaceutical industry taking centre stage, there is a high chance that the value of the stock would continue to rise in the foreseeable future.

 

 

 

As can be seen from the above graphs, the returns on the stock are not very encouraging. However, the associated risk has reduced from 9% to 7% which is a good sign. Also, with the company entering into the coronavirus vaccine trial phase, the returns in the last two months have been in a positive direction. It recorded a new high on the 27th of April, 2020.

 

The crisis has left all our industries exhausted. With new studies cropping up every day and negating the previous ones, much about the future is uncertain. On the academic front, Cambridge University has cancelled its regular classes until the next academic year. It plans to go entirely online. There’s no point debating whether children should be allowed to handle mobile phones and tablets at a young age as they will necessarily have to. 

 

The mood induced by the government in the current scenario should give positive results. The philosophy of being self-reliant is what India needs to adopt and go ahead with. The mega-booster package announced by the government would be of great help in this direction. For sectors like tourism, direct monetary benefits might not be possible in the near future. The government has, however, changed the bankruptcy rulebook so that companies stay afloat. 

 

In terms of liquidity issues and financial stress, a similar situation presented itself in 2008 during the global recession. This did not stop companies like Uber from proving their mettle and establishing a brand image. India does have the potential to come back bigger and better. We do not have a dearth of ideas. With companies like Apple Inc. planning to shift 20% of its operations from China to India, this is just the beginning.

 

References

https://www.moneycontrol.com/

https://www.prsindia.org/theprsblog/central-government%E2%80%99s-response-covid-19-pandemic-may-11-%E2%80%93-may-22-2020

 

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