Coronavirus Impact: A long shutdown in China will leave a mark on key sectors
India has imported goods from China worth $52 billion between April and December 2019.
By ET Bureau | Updated:
Covid-19 fallout: China shutdown disrupts supply chains
India may be relatively immune to the partial shutdown in China on account of coronavirus but a prolonged shutdown may have material impact on sectors such as steel, oil & gas, pharma, auto ancillaries, consumer durables, IT services and chemicals. India has imported goods from China worth $52 billion between April and December 2019. Electrical machinery, electronics, organic chemical and plastic are among the top items of imports for India from China.
Indian exports to China during this period were worth $13 billion. Companies from these sectors may face pricing and supply-chain shocks. A compilation of some sectors and stocks that are going to be impacted due to the Covid-19 virus, according to Kotak Securities:
STEEL
China is a net steel exporter. China demand has been impacted more than supply, resulting in higher domestic inventory and pressure on domestic prices. Weak domestic steel prices in China and lower iron ore prices outside China have started impacting steel prices outside China too.
Lower steel prices directly impact earnings of all steel producers. Among the four major steel companies, earnings of SAIL and Tata Steel are more sensitive to steel prices at they are more integrated in their operations followed by Jindal steel, said Kotak.
OIL & GAS
Downstream companies will be impacted due to a slowdown in demand for petrochemical and refined products.
Lower refining margins will lead to lower profits for downstream oil companies such as BPCL, HPCL, IOCL and RIL. Upstream companies such as Oil India and ONGC will be impacted due to slower growth in oil and gas demand due to reduction in travel and industrial activities, according to Kotak.
PHARMACEUTICALS
The Indian pharmaceuticals industry has deep linkages to China, given its reliance on China for critical elements of a drug’s supply chain, starting from basic chemicals, key starting materials (KSM), intermediates and even active pharamaceutical ingredients (APIs). Kotak said most companies can manage supply disruptions from China until the end of June; however, there could be meaningful supply shocks if the disruptions are prolonged.
Among Indian companies, Laurus Labs has the highest potential impact from China.
Aurobindo, with an annual 2.5K- tonne requirement, Lupin with a 1K-tonne annual requirement and Sun with a 0.85K-tonne requirement have the largest API consumption requirements for the US, with the top-10 APIs accounting for 70-80% of the total API consumption, the brokerage said.
The Indian pharma industry is highly dependent on the Chinese pharmaceuticals industry for supplies of API, intermediates, and many organic chemicals. Total pharmaceutical and organic chemical imports from China are close to $10 billion of which bulk drug imports are more than $2.5 billion in value as per a report by Haitong Securities.
It is important to note that the total value of pharmaceutical production in India is more than $30 billion (for exports and consumption in India).
Here’s how the outbreak of coronavirus in China can impact the Indian pharma companies:
The sector will be impacted due to a disruption in the supply chain of bulk chemicals and intermediates. Kotak said agrichemical players have gradually reduced dependence on China in recent years post environment-led supply disruptions. Domestic players carry around two months of inventories for key raw materials.
Elevated input costs may impact profits for less integrated players such as Dhanuka Agritech and Rallis India, the brokerage said.
Kotak said it is difficult to quantify the exact impact as components are imported by both OEMs and vendors. Hero Motocorp imports alloy wheels from China, which may get impacted if the situation does not improve in 1-2 months.
The company has supplies for 45-60 days currently. Also, the supply of certain fuel injection parts, imported by Bosch, could be impacted. Tyre manufacturers may benefit as Chinese radial imports may decline although it is a small part of the industry now (around 5%), it said.
CONSUMER DURABLES
The consumer durables sector will be impacted due to a shutdown of manufacturing units in China. Indian durables manufacturers have a large dependence on China for critical inputs such as compressors for air-conditioners and refrigerators.
Almost all requirements of compressors as well as certain other components required for white goods are imported, with a bulk of the same being imported from China.
Kotak said companies that may get impacted are Havells (Lloyd), Voltas, Whirlpool. Electrical goods and appliances companies such as Crompton Greaves Consumer and Havells also import lighting and switchgear products from China and may be impacted, it said.
IT SERVICES
Travel and transportation is a key vertical for Indian IT services companies with clients comprising airline companies, railroads and hotels. COVID-19 will reduce travel, impact financials and the ability to spend. Mindtree and Hexaware have the highest exposure, said Kotak.
The exposure of other companies is in the mid-single digits. Also, there could be indirect impact in the form of reduced east-bound air travel and potential restrictions on west-bound travel.
Indian exports to China during this period were worth $13 billion. Companies from these sectors may face pricing and supply-chain shocks. A compilation of some sectors and stocks that are going to be impacted due to the Covid-19 virus, according to Kotak Securities:
STEEL
China is a net steel exporter. China demand has been impacted more than supply, resulting in higher domestic inventory and pressure on domestic prices. Weak domestic steel prices in China and lower iron ore prices outside China have started impacting steel prices outside China too.
Lower steel prices directly impact earnings of all steel producers. Among the four major steel companies, earnings of SAIL and Tata Steel are more sensitive to steel prices at they are more integrated in their operations followed by Jindal steel, said Kotak.
OIL & GAS
Downstream companies will be impacted due to a slowdown in demand for petrochemical and refined products.
Lower refining margins will lead to lower profits for downstream oil companies such as BPCL, HPCL, IOCL and RIL. Upstream companies such as Oil India and ONGC will be impacted due to slower growth in oil and gas demand due to reduction in travel and industrial activities, according to Kotak.
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PHARMACEUTICALS
The Indian pharmaceuticals industry has deep linkages to China, given its reliance on China for critical elements of a drug’s supply chain, starting from basic chemicals, key starting materials (KSM), intermediates and even active pharamaceutical ingredients (APIs). Kotak said most companies can manage supply disruptions from China until the end of June; however, there could be meaningful supply shocks if the disruptions are prolonged.
Among Indian companies, Laurus Labs has the highest potential impact from China.
Aurobindo, with an annual 2.5K- tonne requirement, Lupin with a 1K-tonne annual requirement and Sun with a 0.85K-tonne requirement have the largest API consumption requirements for the US, with the top-10 APIs accounting for 70-80% of the total API consumption, the brokerage said.
It is important to note that the total value of pharmaceutical production in India is more than $30 billion (for exports and consumption in India).
Here’s how the outbreak of coronavirus in China can impact the Indian pharma companies:
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AGRICHEMICALSThe sector will be impacted due to a disruption in the supply chain of bulk chemicals and intermediates. Kotak said agrichemical players have gradually reduced dependence on China in recent years post environment-led supply disruptions. Domestic players carry around two months of inventories for key raw materials.
Elevated input costs may impact profits for less integrated players such as Dhanuka Agritech and Rallis India, the brokerage said.
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AUTOMOBILES & AUTO COMPONENTSKotak said it is difficult to quantify the exact impact as components are imported by both OEMs and vendors. Hero Motocorp imports alloy wheels from China, which may get impacted if the situation does not improve in 1-2 months.
The company has supplies for 45-60 days currently. Also, the supply of certain fuel injection parts, imported by Bosch, could be impacted. Tyre manufacturers may benefit as Chinese radial imports may decline although it is a small part of the industry now (around 5%), it said.
CONSUMER DURABLES
The consumer durables sector will be impacted due to a shutdown of manufacturing units in China. Indian durables manufacturers have a large dependence on China for critical inputs such as compressors for air-conditioners and refrigerators.
Almost all requirements of compressors as well as certain other components required for white goods are imported, with a bulk of the same being imported from China.
Kotak said companies that may get impacted are Havells (Lloyd), Voltas, Whirlpool. Electrical goods and appliances companies such as Crompton Greaves Consumer and Havells also import lighting and switchgear products from China and may be impacted, it said.
IT SERVICES
Travel and transportation is a key vertical for Indian IT services companies with clients comprising airline companies, railroads and hotels. COVID-19 will reduce travel, impact financials and the ability to spend. Mindtree and Hexaware have the highest exposure, said Kotak.
The exposure of other companies is in the mid-single digits. Also, there could be indirect impact in the form of reduced east-bound air travel and potential restrictions on west-bound travel.
Coronavirus outbreak in China has hit supply chains across the world and India is no exception. Indian importers of raw materials too are facing problems as China factories remain shut for some time now. But the development has also brought some relief for domestic companies who competes with finished Chinese goods. Santosh Meena, Senior Analyst at TradingBells believes that electronic equipment, organic chemicals, fertilisers and plastics are top import sectors which may benefit from fall China imports.
Here are five likely beneficiaries of the reduced imports:
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