Coronavirus: Here’s how long Indian businesses think their revenues will take to recover
In an interaction with SMBStory, Arun Singh, Chief Economist at Dun & Bradstreet India, explains the impact of the coronavirus lockdown on businesses and presents findings from the research firm’s poll.
A little over a month after India went into a lockdown to contain the spread of the coronavirus, the pandemic is poised to severely impact the country’s economic growth. It has already caused significant disruptions in various industries and crippled the MSME sector, where businesses largely depend on recurring sales to meet fixed costs.
The probability of countries entering recession and companies going bankrupt has increased, and India is not likely to remain decoupled from the global meltdown, according to Dun & Bradstreet’s Economy Forecast, in March 2020.
The research firm carried out a survey of Indian corporates and conducted a poll with bankers, professionals, sourcing and procurement managers on the depth of the disruption and the anticipated recovery period.
“In terms of reduced spending, the areas most likely to be hit are capital expenditure (62 percent), advertising and marketing expenditure (45 percent), and employee expenditure (33 percent). Around 56 percent are planning to onboard alternate vendors,” says Arun Singh, Chief Economist at Dun & Bradstreet India.
This business accounting software for MSMEs, built by two brothers, has sold over 3 lakh licences
In an exclusive interaction with SMBStory, Arun Singh explains the situation in more detail and presents more findings from the poll.
Edited excerpts from the interview:
SMBStory [SMBS]: What is the depth of disruption faced by Indian businesses, especially the MSMEs? How has the economics of the manufacturing industry been impacted?
Arun Singh [AS]: The COVID-19 outbreak has caused severe demand destruction across multiple sectors. Among the worst-hit sectors are gems and jewellery, entertainment, hospitality, transport, tourism, and livestock.
The livestock sector is experiencing weekly losses to the tune of Rs 7 to 8 billion from the sale of chicken alone. The tourism sector is expected to have foregone revenues of Rs 350 billion from foreign tourists alone during March and April, combined.
Delay in payments have long been a primary problem for the MSMEs. Dun & Bradstreet data shows that only 53 percent of large companies in India pay their suppliers on time. A slowdown in demand due to the outbreak of COVID-19 may force large companies to scale down their production.
The ensuing cash flow disruptions will lead to delayed payments to MSMEs, triggering an avalanche of credit defaults and permanent business closures of highly leveraged MSMEs. However, the depth of the impact would largely depend on how soon the virus is contained and how soon businesses resume their operations.
SMBS: How are businesses reshaping across expenditure, revenue sentiment, and additional measures?
AS: Businesses are most likely to defer or even cancel planned capital expenditure. This is because investments in areas such as facilities management have a direct impact on the bottom line of companies. Product launches, especially in sectors such as automobiles and consumer durable goods, are expected to be postponed due to muted consumer spending.
Businesses may also either reallocate out-of-home advertising spending to digital channels due to social distancing or defer it due to demand uncertainty.
Here is the percentage of respondents who expect a deferment or cancellation of planned investments in the following areas, according to our survey:
SMBS: What are some of the other insights from your poll?
AS: Our polls have shown that 42 percent of professionals believe that their business would take four to six months for their company’s revenue to rebound to pre-COVID-19 levels. Thirty percent of the respondents, however, think that their business would take seven to 12 months for recovery. Seventeen percent believe they can bounce back in one to three months whereas 12 percent believe that it would take more than a year for them to get back on their feet.
Sectors such as drugs and pharmaceuticals, retail and wholesale trade, and livestock may take up to six months to recover after the COVID-19 outbreak subsides. A majority of the products in these sectors fall under the category of essential commodities. Hence these sectors will recover sooner than sectors such as logistics and metals, which may take up to a year to recover.
Sectors such as automotive, electronics, gems and jewellery, banking, entertainment, tourism, and hospitality may take more than a year to recover. Many of these sectors are highly reliant on export demand, hence global recessionary pressures coupled with domestic weakness will prolong the recovery of these sectors.
SMBS: How important will digital tech adoption be in the recovery mechanism for businesses, and also to protect from future crises?
AS: The COVID-19 outbreak has forced many businesses to rethink their operating model. In-person sales meetings are no longer a viable option for the foreseeable future. Hence, selling has moved to virtual meetings, phone calls, and direct mail. Similarly, large trade shows and conferences have been cancelled, cutting a major source of leads.
Therefore, digital customer engagement strategies are moving to webinars. Chaos presents an opportunity for innovation. The new normal for companies is embracing digital technologies for many facets of the business. Some of the learnings from this crisis will make companies more agile.
SMBS: How will the next six months shape up for these businesses?
AS: In addition to the apparent risks such as muted demand and supply chain disruptions, businesses will be faced with heightened credit risk in the coming months. Our analysis shows that the past two recessions have been accompanied by precipitous increases in bankruptcies.
During the Great Recession, business bankruptcies in the US spiked by 35 percent to 40 percent for more than two years just before and trailing through the recession. This bankruptcy velocity was two to three times higher than the average yearly bankruptcies reported during the economic expansion period of 2010 to 2019.
According to the IMF, countries have so far taken fiscal actions amounting to around $8 trillion to mitigate the economic implications of COVID-19. Regardless of the stimulus, the world economy will see the biggest contraction in almost a century. Companies in a weak financial state are at an increased risk of failure and could get weeded out. For the companies that remain, the risk of late and non-payment will increase substantially over the next months.
SMBS: What advice do you have for smaller entrepreneurs who have been hit by the crisis?
AS: A downturn response should focus on three things though the level of focus may vary depending on the company’s financial and strategic position. One, businesses need to ensure that they remain viable. They can do so by establishing a spend control tower, divesting the unprofitable business, undertaking cost transformation programmes, etc.
Entrepreneurs need to reassess their company’s credit policy to recalibrate the portfolio risk profile for new and existing customers. Neglecting to select target accounts based on risk will have a direct impact on customer acquisition cost.
Two, businesses need to ensure that they become resilient. They can do so by focusing on their core, promoting inclusive work culture, securing funding to strengthen core areas, etc. Three, businesses need to ensure that they are able to thrive. They can do so by investing in product leadership, grabbing attractive mergers, and acquisition opportunities, etc.
(Edited by Javed Gaihlot)
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