The lockdown of factories and halting of construction work due to spread of coronavirus has terrified A.M. Naik, Chairman, Larsen and Toubro (L&T). He has never faced such a crisis in his 55-year-long career. This time, the company has to take care of the 1.6 lakh contract workers at sites across India and Middle East even though it knows its earnings during the period will be negligible.
It knows project executions and payments will be delayed. Moreover, the companies will stop planning new capacities, and that will affect the construction giants cash flows too. The future is under a cloud, and a pretty thick one at that.
The auto industry, which was struggling even before due to economic slowdown, is facing more trouble. R.C. Bhargava, Chairman of Maruti Suzuki, is right now worried about how fast India can contain the virus outbreak. "The plants have closed operations. We will be able to assess losses and count on demand only after restarting operations," he says. Again, Maruti is retaining with full pay its entire workforce. Its component suppliers and dealers are doing the same. Bhargava's main concern when Maruti's plants open is dent in confidence of customers.
If these two top executives, at two of India's most respected companies, are finding it hard to clearly plan a future beyond the current lockdown, for others, things must be worse. But look they must. That is why, whenever the lockdown ends, Indian corporates are gearing up to restart plants and projects while, at the same time, planning for the worst. But it will not be easy. Some, like JSW Steel - which is still operating blast furnaces at minimal levels as switching off will lead to cooling and hardening of residue at the bottom -will have to work out plans to keep paying off its Rs 50,000 crore debts on time in a down market while restoring supply chains for raw materials and distribution chain of finished products. While reviving the collapsed demand will remain the requirement of manufacturers, players in real estate will be hoping for liquidity injection from the government to deliver stuck projects and create demand.
All this after they get employees back to work and ensure their safety, tie up fuel linkages again and get raw material supply chains up and running once more. The challenges are several, but solutions are limited.
Tackling Cash Flows
That demand has collapsed and will take many quarters to come back is a given. This will make it hard for companies to pay off loans. "We are staring at an unpredictable future. Businesses are shut and capacity additions suspended. Coronavirus has brought the largest economies of the world to their knees. Indian businesses are not so strong to battle it out," says A.M. Naik, who has steered L&T through multiple crises in the past. L&T has consolidated debt of more than a lakh crore, including that of finance arm. Reports in early March said the company was planning to reduce it to the extent of Rs 30,000 crore by selling assets.
Harsh Goenka, Chairman, RPG Enterprises, says the entire business cycle, including sourcing, value addition and its eventual conversion into cash, has gone into a freeze for most sectors. "What we are, therefore, facing is tightening of liquidity, and companies have to manage it astutely," he says.
Some say the companies cannot do this on their own. "The RBI should make provisions and allow one-time restructuring of all loans depending on future cash flows of respective companies," says Hemant Kanoria, Chairman, Srei Infrastructure Finance.
Until the downtrend reverses, companies will need to tighten their belts by reducing operational costs -including employee, raw material and fuel costs - and putting on hold all expansions, diversifications and acquisitions.
Balancing Balance Sheets
Some of India's most debt-laden companies are Reliance Industries (Rs 3.07 lakh crore), Tata Motors (Rs 1.29 lakh crore), Vodafone Idea (Rs 1.15 lakh crore) and Tata Steel (Rs 1.1 lakh crore). Except for Reliance, which has Rs 1.5 lakh crore cash reserves, others have limited surplus.
Take Tata Motors, which had a gross debt of Rs 1.29 lakh crore in December. It includes passenger and commercial vehicle manufacturing business in India, Jaguar Land Rover (JLR) and auto financing subsidiary Tata Motors Finance Ltd. The company's vehicle sales fell by one-sixth to 12,924 units in March from 74,679 units in the same month the previous year. Can the company meet its loan repayment commitments amid such crash in sales? Holding company Tata Sons had injected Rs 6,500 crore in the automaker last year to increase investor confidence. But that may not be enough.
Another crisis may be looming over Vodafone Idea, which has to pay the government adjusted gross revenue dues of Rs 53,000 crore. This is in addition to the gross debt of Rs 1.15 lakh crore. The struggling telecom player posted a Rs 6,400 crore loss in the third quarter. Analysts expect that a sharp decline in subscriber base will lead to losses in the fourth quarter too. Can it meet its repayment obligations if the business continues to be down?
Giving partial relief, the RBI recently allowed financial institutions to grant three months moratorium on interest on term and working capital loans of corporates, which are struggling with liquidity. However, Kanoria says the banks are not clear about the decision. "Some are giving the extension but others are not. The stimulus decisions should not be half-hearted. The present circumstances are beyond anyone's control."
The Roadblocks and Possible Solutions
- Problem 1: Factories are shut. When they reopen, they should be able to ensure safety of lakhs of workers. They will not be able to operate at full capacity due to restrictions on number of workers inside factories
Solution: Factories and industrial complexes need to be quarantined for the time being and food and medicines supplied to workers. Production can start with staggered shifts and remote employees
- Problem 2: Most infrastructure and manufacturing companies such as Tata Steel, Reliance Industries, JSW Steel, Vodafone Idea and Tata Motors have huge debts. Since cash flow has fallen, it will be tough for them to service their loans
Solution: They will have to cut costs - raw material, employee and fuel - drastically to maintain cash flows. Suspend expansions, acquisitions and diversifications. Conserve cash on books. The RBI should allow banks to restructure loans based on sector.
- Problem 3: Lack of demand. No buyers for houses, cars and other non-essential items. This is affecting manufacturing and commodity companies
Solution: The government will have to provide liquidity to consumers in the form of tax waivers, subsidies and rural development and job guarantee schemes. The companies should come up with low-cost products that can sell even in poor demand conditions
- Problem 4: Movement of finished products from factories, especially between states, has become difficult. Dealer and sub-dealer networks have been broken down in many cases because of shortage of labourers
Solution: Companies can bring back some dealers as well as labourers by offering medical insurance and safety gears. Coordinate with government agencies for smooth transport of goods. Local governments should provide support to operation of plants and logistics.
- Problem 5: No new orders at engineering and construction companies. Until January, at least 60 per cent orders of infrastructure companies were coming from the government. The medical emergency is expected to empty government coffers in the short to medium term. The companies are unlikely to get pending payments for work done.
Solution: Retain the workforce with minimum costs. Conserve cash. Shift focus from present cash flow to future cash flow. Look at smaller projects. Use the spare time for innovation
The economy has been slowing down for the last two-three years. Coronavirus has come as a debilitating blow. Industry is looking for solutions from the government and banks to avoid a collapse but the banking sector is already reeling under non-performing assets. If borrowers don't have cash to repay their loans, banks and other financial institutions will be in deeper trouble. It is here that the RBI's role becomes very important. In real estate, for instance, Niranjan Hiranandani, Founder and Managing Director of Mumbai-based real estate player Hiranandani Group and National President of Assocham, says financial institutions need to support the recovery process at two levels. "First, help the developer overcome the liquidity crisis. Second, encourage the potential buyer by providing new loan facilities and flexible repayment options." He says the lockdown will have at least 20 per cent impact on real estate off-take. "How much time it will take for recovery and whether it will be a 'return to normalcy' or a 'new normal' - these are questions where one hopes for the best," he adds.
A.M. Naik of L&T says new capacity additions and infrastructure creation will not happen in the near future. "It will be a huge bottleneck in the country's economic growth," he says. Lack of new orders will affect engineering and construction companies. Until January, at least 60 per cent orders for infrastructure companies were coming from the government. The medical emergency is expected to empty the exchequer in short and medium term and lead to reduction in public expenditure. Another problem will be delays in payments for executed projects.
To get past the crisis, the companies will have to retain workforce with minimum costs and conserve liquidity. Infrastructure companies will have to look at smaller projects to keep going, besides using the time for innovations in engineering. Goenka of RPG says liquidity is the lifeline of a business and all measures that enable conservation of cash within businesses will be critical for survival.
The Missing Customer
A major worry for manufacturers is bringing the buyer back to the market. Will the lockdown change their willingness to spend? "Getting customers back to sales offices will require a new format of communication. These will need to be structured to work at a new, totally different level, something very different from the past," says Hiranandani. The companies, at least in the initial few months, will have to offer products at heavy discounts. They may even have to come up with newer low-cost products to attract consumers.
Raamdeo Agrawal, Chairman, Motilal Oswal Financial Services, says companies in essential sectors can resume normal operations within 15-20 days after the lockdown is withdrawn. But discretionary businesses will face trouble. "Some non-essential businesses such as automobile and real estate will see deferment of purchases. But premium businesses like airline, hospitality and luxury homes will vanish," he says.
When a customer is unable to reach the construction site or sales office, this effectively means almost zero demand, says Hiranandani. "Sales and marketing activities are happening across digital, online and telephony based platforms with social media getting a larger share of the communication roll-out, but it is not the same as was the case before the pandemic struck," he says. "Getting customers back to sales offices will require a new format of communication. It will need to be structured to work at a new, totally different level, something very different from the past," says Hiranandani, who worries about the possibility of property buyers turning into 'fence-sitters'.
The poor demand in automobile and real estate businesses will trickle down to companies in metal, cement and power sectors too. Airline and hospitality industries, which largely depend on tourists and corporate travelers, will shrink substantially, at least for the next two quarters. Players in sectors such as consumer durables and textiles where demand is discretionary will also face a lot of hardship. "In terms of losses, the fact that a lot of fixed costs are continuing means there will be under-recovery. Sales revenues for the first quarter are going to be negligible for most manufacturing operations," says Harsh Goenka.
Industries say the government will have to provide liquidity to consumers in the form of tax waivers, subsidies and additional funds for rural development and job guarantee schemes if it wants to push up demand.
Days before the lockdown in Mumbai, migrant workers started leaving industrial townships. This has paralysed operation of factories that produce essential items. The Maharashtra government finally had to send senior officials to these townships to convince workers to join back. In one incident, Raigad District Magistrate Nidhi Chaudhary addressed contract workers at JSW Steel's factory in the district and asked them to get back to work since they could not return to their hometowns. About 340 units in the district have been working partly under the exemption given by the government.
Besides such issues, manufacturing companies are facing other serious operational problems. L&T is spending Rs 500 crore a month to provide food and medical assistance to its 1,60,000 contract labourers. The Tata group is paying full salaries to temporary workers of its steel, power and automobile companies. Continuing this beyond a couple of months may be unsustainable.
Operationally, managements are getting ready to deal with multiple challenges post the lockdown. The first priority is to ensure safety of workers. They will still not be able to operate at full capacity due to restrictions on number of workers inside factories. Camps of workers will need to be isolated. And they will have to work in staggered shifts with optimum distancing from each other.
Managing logistics will also be tough as some states may continue with the lockdown. Dealer and sub-dealer networks have been broken in many cases because of shortage of labourers. Bringing back a portion of dealers as well as labourers by offering medical insurance and safety gears will be the key. So will be the co-ordination with government agencies for smooth transport of goods.
Whenever the nationwide lockdown ends, manufacturing companies will restart full-stream production. They are in touch with state governments for smooth evacuation of products from factories. Tata Steel has stepped up measures to reduce risk to employees as well as communities that are around its plants.
Travel restrictions have been implemented and majority of employees have been asked to work from home. Additional resources are being put in place to improve hygiene and enforce strict social distancing for employees and other stakeholders who have to attend to essential activity at workplace. Tata Steel has taken several initiatives to ensure that the operations are in a state of readiness. Appropriate protocols have been put in place to minimise the presence of employees at their workplace, including at their steel making hubs and mining operations.
Most companies in essential sectors have been operating in staggered shifts with minimum workers since the lockdown was announced. FMCG companies have been operating at almost half their capacities. JSW Steel says it is preparing to start operations at all locations. The refinery and petrochemical complex of Reliance in Jamnagar will also scale back production to normalcy soon. The auto companies based out of Pune have also asked their workers to be ready to come back. "Restarting work with tens of thousands of workers is going to be a critical task," says an official with Reliance.