Second wave of Covid-19 may hit India Inc’s recovery

The second wave of the Covid-19 pandemic is likely to hit the growth momentum that big consumer giants had gathered in the March quarter. The rising cost of commodities, localised lockdowns, disruption of the migrant workforce, and a change in the spending habits of consumers do not augur well for them. They also have a huge social responsibility on their shoulder to help the country navigate out of the current turmoil spurred by stretched healthcare infrastructure and the acute shortage of oxygen supplies at hospitals.

The March quarter earnings have shown how biggies in the consumer space emerged from the pandemic that ruined their revenue growth during early 2020-21. Some tweaked their strategies, launched new products, and promoted digital more in line with the efforts to rein in the virus. The quarterly numbers with a huge surge in profits—not completely unexpected given the low base a year ago—have given a big boost to sentiment in the country.

Among the consumer-focussed companies, Reliance Industries (RIL), Hindustan Unilever (HUL), and Nestlé, which came out with their quarterly numbers recently, have clearly mirrored the growth the country witnessed post the first wave in 2020. Without exception, everyone has had a word of caution for the new financial year.

HUL, the country's largest consumer goods company, reported a 41% year-on-year growth in net profit to ₹2,143 crore in the fourth quarter ended March 31, 2021. The company, which was amongst the fastest to recover within the FMCG companies from the woes of a nationwide lockdown last year, had switched its attention to manufacturing products that were high in demand, including hygiene, healthcare, and nutrition products. It reportedly launched over 50 new products.

“We were riding a strong momentum going into the new fiscal and the first two weeks of April reflected that sentiment. However, the last two weeks of April have seen some turbulence as Coronavirus cases have surged. The focus of all stakeholders should be on taming the virus and ramping up the pace of vaccination,” Sanjiv Mehta, HUL’s chairman and managing director, had said while declaring the March quarter results.HUL also leveraged technology across the value chain.

“The digital opportunity has to be maximised, easing the pressure on big cities while bringing development across the country,” said Mehta recently at the Amazon Smbhav Summit. He reiterated the need for small and medium enterprises to adopt a digital-first business model. “In fact, leveraging technology in businesses will have a bigger impact on collective productivity gain that comes from widespread digitisation,” he had said.

HUL has responded to the challenges by enhancing manufacturing capacity by 30%. Around 500,000 small traders and shopkeepers in the country, who stock HUL goods, have begun placing their orders directly on its online ordering platform, the Shikhar app. The app is designed exclusively for HUL retailers to help them order anytime, anywhere, according to their convenience. The company said the sudden surge in numbers corresponds to a fivefold jump in a year.

The rising inflationary pressures have forced HUL to remain focussed on volume growth.

HUL said it would facilitate and pay for the vaccination of almost 300,000 people, including employees, their families, and trade partners as the second wave continued to threaten its revenue growth.

In an analyst presentation, the company said the demand outlook is difficult to predict in the near term amid the Covid-19 surge. “Our agility and responsiveness across the value chain are significantly better than pre-Covid. There is an elevated inflationary pressure in select large categories,” said the company.

The more-than-doubling of RIL’s consolidated year-on-year net profit to ₹14,995 crore in the March quarter, despite a low base a year ago, has surely exceeded the market’s expectations. Its quarterly revenue grew at 14% to ₹1.72 lakh crore. For 2020-21, consolidated net profit grew 35% to ₹53,739 crore, but its consolidated revenue fell 18% to ₹5.4 lakh crore, from ₹6.6 lakh crore in 2019-20. The company, which generated nearly 75,000 new jobs during the last financial year, has repurposed its Jamnagar facility to produce life-saving medical-grade oxygen. It is also setting up Covid-19 care hospitals for communities in dire need.

Mukesh Ambani, chairman and managing director, said in a note that RIL’s consumer businesses have proved to be a digital and physical lifeline for the nation in these challenging times. Jio’s high-speed connectivity services enabled millions of Indians to work from home, study from home, and even receive healthcare from home. Reliance Retail ensured safe supplies of essential goods and services to customer homes, according to Ambani.

RIL said in a statement that it has now become India’s largest producer of medical grade liquid oxygen from a single location. At its refinery-cum-petrochemical complex in Jamnagar and other facilities, RIL now produces over 1,000 tonnes of the life-saving resource per day, accounting for over 11% of India’s total production. In April, RIL supplied over 15,000 tonnes of medical grade liquid oxygen free of cost, helping nearly 1.5 million, it said.

The maker of Maggi noodles, Nestlé India, reported a 14.7% jump in its March quarter net profit to ₹602 crore, marginally above the market’s estimates. Supported by the surge in in-home consumption during the pandemic, the packaged foods company clocked double-digit growth in domestic sales. Its revenue from operations for the quarter was up 8.5% at ₹3,611 crore year-on-year.

The company is setting up vaccination camps across its factories to provide vaccination to employees. “We are in the process of extending our pioneering industry commitment of Nestlé Suraksha medical insurance protection to our distributor salesforce against Covid-19 for an additional year,” said Suresh Narayanan, chairman and managing director, in a statement.

“While the Nestlé India family has learnt to cope with the operating volatility in the pandemic, recent sharp escalations in key raw material prices pose challenges that we will resolutely respond to while maintaining the integrity of our business model,” said Narayanan. Reportedly, the company had witnessed some headwinds in terms of the rising cost of packaging materials and commodities. However, the decision to purchase raw materials in advance and lock their supplies helped the company accrue the benefits of low prices in the quarter.

Radhakishan Damani’s Avenue Supermarts, the company that runs the DMart hypermarket chain, said in a stock exchange filing that its standalone revenue from operations stood at ₹7,303 crore for the March quarter, up 18% year-on-year, nearly 2% ahead of what analysts at global brokerage firm Goldman Sachs had estimated.

But the offline retail giant, which runs 234 stores across the country, said its business has been impacted due to localised restrictions imposed in several cities. The company, which is yet to report its March quarter earnings, has sounded a warning over the rising Covid-19 cases. “Our business will continue to be dependent on how the pandemic trends further and the consequent restrictions for operating our stores,” said the company. Of course, the business has already been hit owing to localised restrictions, stores closing on certain days, to abrupt shutdowns for a continuous week or more.

During the March quarter, however, Avenue Supermarts has continued to grow strongly. It added 13 more stores during the three-month period. A few weeks ago, Goldman Sachs had said the strong fourth-quarter revenue and store additions demonstrated the company’s ability to drive consumer footfall due to attractive price positioning compared to other online and offline peers. The retailer is now steadily widening its e-commerce reach to offset the loss in offline sales.

Most companies are reinventing their strategies to combat the pandemic-induced demand recession. The June quarter results will likely indicate if they are on the right path.