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Are these green shoots real?

Recently the Prime Minister, Mr Modi in an interaction with the Chief Ministers of the states said that Green Shoots in the economy are visible meaning the economy is on the path of recovery from abyss. While making this statement he depended upon some facts like rising power consumption which was earlier falling, doubling of fertilizer sale in May compared to last year, a 13% increase in Kharif sowing this year, two-wheeler demand and production reaching 70% of pre-lockdown level, digital payment in retail reaching pre-lockdown level, increase in toll collection in May and bouncing back of exports in June to last year’s levels after three months of downfall. These are good indicators of the economic recovery and keeping these factors in the hindsight we at Sawdust have tried to analyse the ground realities and how the situation may pan out in the coming months.

Some indicators are encouraging indeed

Yes, some indicators point towards economic recovery and the country is getting past the worst.  For example, tractor sales were down 54.7%YoY in May compared to a 79.4% decline in the previous month. Currency in circulation continued to rise and was up 18.4% YoY, supported partially by government spending and rural activity.

The Purchasing Managers’ Index for manufacturing (PMI) recovered to 47.2 in June from 30.8 in May reflecting expansion in manufacturing activity. Meanwhile, GST mop-up at Rs 90,917 crore in June is an improvement of 46.6% over the previous month. Issuance od E-way bill has increased to 39.9million in June as compared to 25.4 million in the previous month indicating increased inter-state and intra-state movement of goods. Passenger vehicle sales in June increased to 116,449 as against 36,697 in the previous month. Two-wheeler sales by Hero Motor and TVS in June almost equalled that of February sales. Of course, growth was largely aided by rural demand.

Unemployment rate falling

Unemployment data from CMIE released recently were also inspiring. They show that the rural unemployment rate dropped sharply from a peak of 26.7% in early April to 7.3% in the third week of June as containment measures were scaled back. That leaves the rural unemployment rate within touching distance of where it was prior to the nationwide lockdown. There is no doubt that government’s rural employment (MGNREGA) scheme has played a role in supporting the labour market in rural India. Employment generated by the scheme surged in May and is likely to have risen further in June as the government outlined plans to expand the programme as part of its stimulus package.

On the other hand, urban prospects look much more bleak. Though the CMIE data show that the unemployment rate has also dropped in urban areas, unemployment is still way above pre-lockdown levels. Bringing down the unemployment rate in urban areas is an uphill task for the government especially in view of the recent upsurge in COVID cases in some urban areas.

Industry is cautious about future prospects

However, people from the industry are little more cautious while arriving at conclusion as to their demand prospects. Majority of the people we spoke to are of the opinion that actual revival may happen only in the second half of the year and that too subject to certain ‘ifs and buts’. One of the biggest uncertainties now is the COVID itself and the revival of the economy will largely depend upon government’s ability to contain its spread. It’s also hoped that by then some vaccine will be developed to counter the pandemic.

Asian Paints is seeing a stronger recovery in smaller towns, with metros and tier 1 (40- 50% of sales) seeing slower recovery. The company is focusing on products for the lower end of the market which are largely volume driven. Meanwhile, Asahi India Glass says that the sales pickup post reopening has been strong.

Improving but still far from normalcy

Somany Ceramics started its financial year virtually from May 4th onwards as there were no sales during lockdown period. After May 4th, volume was at 45-50% of last year’s volume in May and in June it has reached 60-65% of June 2019 sales. The company expects the sales of building materials to decline by 15-25% during the current financial year. According to the company, the industry may see double digit growth only when the real estate sector revives itself. Similarly, after subdued March sales, Kajaria Ceramics reported zero sales in April while May showed some traction with 35% of sales compared to May, 2019. The management has guided that the showrooms have resumed operations from June as retail demand in Tier II, III and IV cities is encouraging.

Greenpanel Industries expects to recover to Pre-lockdown levels in MDF exports by July’20 and in domestic sales by Oct-Nov’20. Company does not expect any price correction in MDF segment going forward. For Greenlam Industries Ltd, April’20 was a washout month and operations have gradually ramped up in May and June. Since then domestic business has reached 40‐50% and exports business has reached 80% of pre‐lockdown levels.  Company is targeting incremental market share gains in domestic market as there is significant supply side disruption for smaller unorganized players with working capital management going to be a herculean task for them during the present scenario.

According to Prince Pipes, agriculture pipe demand has been robust after partial lifting of the lockdown while plumbing demand is gradually improving, driven by semi-urban and rural markets. The company believes the Covid-19 slowdown will strengthen the ongoing consolidation as smaller/regional players will find it hard to survive a working capital crunch amid a demand slump, helping larger players with strong balance sheets to gain market share.

Pidilite Industries, on the other hand, was very cautious while talking about future trend. According to the company, it is very difficult to conclude anything about end-consumer demand trends. Reading June sales and extrapolating it could be misleading, as there was pent-up demand which may be coming through. This is especially true for categories like waterproofing where remedial work is happening just before the monsoon season begins. April saw near-zero sales for the company and there has been a progressive recovery in May and June and the recovery is much better in rural areas and smaller cities, and weak in larger cities. West and North India are weaker than South and East India.

Cement demand growing

Demand for cement is, however, better than initial expectations in the North, Central and East markets. In the North region, volumes were down only 10% yoy in May’20 and the trend so far suggests that Jun’20 volumes are likely to be similar to or marginally down compared to last year. In the East region, volumes are expected to be better than last year in most of the markets as demand from individual housing has recovered in urban markets.

In the Central markets, demand is better than May’20, especially from rural areas, and volume should be down only 15-20% yoy now. Demand in South and West markets is in line with estimates (down 30-40% yoy) as the migration of laborers has impacted demand in these regions. Demand is primarily driven by the rural and semi-urban areas.

However, it should be noted that recovering from March-April lows doesn’t mean that the economy is jumping back to pre-lockdown phase all of a sudden and may take several months, if not years, to reach that level. Recovery will be gradual and will depend upon host of domestic and external factors. For the present, we should be satisfied with the fact that worst is behind us.

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