After long delays, we now have the Q4 2020 (ended March 2020) results for all our portfolio companies except one. Typically, companies have one month to report but this time SEBI extended the deadline all the way to July 31. These results capture only a few days of the lockdown period, which started on March 25 and still continues in a few concentrated pockets. The June quarter will show the full picture. Overall, the picture will be ugly, which is hardly a surprise.
The government has done what it could - infused liquidity through repo operations (India's version of QE), cut overnight rates, provided credit guarantees, and allowed moratoriums on consumer loans. The notional size of this stimulus is close to INR 21 Trillion, or about 10% of the GDP, which is comparable to what other western countries have done. But unlike the west, Indian government doesn't have near infinite capacity to fund private sector losses. We have constraints.
At some point, India will have to self-start. People will have to make money. And they will have to spend money. Businesses will have to pay for rents, supplies and wages. Simultaneously, they will have to pay down debt. No pay-down equals no new lending, which equals no growth. After months of pause the entire chain will need to move all at once. And every link in the chain will need to work.
It's a tough ask but the early signs look encouraging. The curve is starting to bend in a few places. India's fatality rate seems manageable (25,600 with 1M+ cases so far) given its size and density. Said another way, India's recovery rate is quite high. We don't have nationwide shutdowns anymore. Instead we now have targeted lockdowns that last small durations. Compliance level, be it masks or distancing, appears to be surprisingly high.
India’s mobility data (we track Google, Apple, and TomTom mobility reports) looks promising as well. Traffic to supermarkets - down 65% in March, is now almost back up to normal. Workplaces are now down to 30% from down 70% in March. Parks, Retail, and Recreation are slowly getting back as well. Congestion statistics in larger cities also suggest street traffic slowly getting back to normal.
The same progress needs to happen on the debt servicing front. Currently there’s a standstill on payments, which will last at least until the end of August. Non-payments carry neither the risk of credit downgrade, nor any penalties. Meanwhile the interest keeps accruing. Pretending that all of this money will be paid back is obviously stupid. Unsecured consumer borrowing - for phones, appliances, holiday travel, even weddings, was growing 40-50% per year before the pandemic hit. These loans are yet to see a downcycle.
The overall effect of pandemic and its economic fallout is bound to be terrible. The effect though will certainly not be uniform across businesses.
Take Pharma sector for example; it has suffered the least during these times. In fact, a few Indian pharma companies are predicting record sales. Production and distribution came back to normal within days. Pricing pressure has eased both domestically and in the US. Buyers are looking for alternatives to their China heavy supply chains, and Indian pharma seems like a viable option.
Homebuilders, including ours, are going through a terrible time. This industry was already slowly consolidating since the last few years. Now the weaker players have no choice but to exit, making way for only a handful of large developers in every market. For instance, Godrej Properties reported awful sales like everyone else, but also reported selling 500 units through purely online sales. They are now investing aggressively in technology. It’s impossible for a small developer to replicate this.
Autos have quite predictably suffered massively. But by now, motorcycle sales at Hero are back to 80% of the last year level. The company anticipates taking market share from … public transit! We could have never imagined this.
So, if the effect will be not be a uniform macroeconomic one, we see no reason why our analysis should be. For us, the appropriate unit of analysis has always been an individual business. This situation is no different. Does our business have an edge? Can the business support its leverage? Does the business generate cash? Can it survive prolonged frozen capital markets? Every new data point, every earnings release, every analyst call, that's all we are focused on. Our sectoral distribution, which we outlined in our last quarter’s letter, remains the same. If anything changes, we will promptly let you know.
Notes & Letters
A collection of our thoughts, views, and excerpts from our investor letters.