Disruptions, as it spreads

Adit JainAs Covid 19 grips the world and its fears spread even faster, panic has unsettled financial markets leading to a collapse in share indices across the world. This has now extended itself from computer screens displaying collapsing stock values, to the real economy. Hotels, airlines, entertainment and retail are the worst effected, with staff being packed home on unpaid leave. The real worry is the essential manufacturing sector, which has been forced into a mandated shutdown on grounds of a health emergency. That is effectively pulling the handbrakes on an already wobbly economy, leading to a likely recession. Algorithms, based on the spread of the virus in other countries, suggest that the next few weeks are critical for India.

Consumer buying behavior, mirroring raised levels of concern, have resulted in a drop in confidence across the world. This is understandable, as spending is often in direct correlation to the feel-good factor. Discretionary spends tend to moderate when people are not sure about their future and remain apprehensive about the very continuity of their employment. Based on a survey by the Reserve Bank of India, the consumer confidence index, which stood at 116 in the first quarter of the previous year, fell to 83 in January 2020. At the time of writing this paper, no updated figures were available, as a new survey is currently in progress. It would not be unreasonable to assume that consumer confidence levels would have shrunk further, in the wake of Covid 19 fears.

Business must recognise that a new normal may be in place for sometime, as opposed to a sharp recovery.

Business planning becomes a lot harder because of uncertainties in the operating environment. Normally companies examine various stress scenarios, the probability of their occurrence and determine their impact on business. At present, this is much trickier. But the issues to examine should include cost-cuts and capitalisation buffers. Liquidity is often a casualty in volatile markets. Companies may be forced to prepare for the worst, including severe revenue disruptions. As projects get cancelled, some service sector firms have reported drops of 50-60% in revenues and believe this will get worse in the months ahead. A recovery may not be quick and therefore there is the compulsion to plan for several quarters of trouble. A strategy frequently adopted in a crisis is to set up a special committee, comprising of senior executives that meets everyday to discuss response strategies for scenarios as they play out. Customers are likely to change their behavior in unpredictable ways, depending on the duration and intensity of the crisis.

A crisis compels managers to reexamine their assumptions and look for new ways of doing things. Cost cuts are easier to accept and fat within the system, simpler to peel off

The important issues to bear in mind are, firstly, the safety of employees; second, stress tests for various revenue scenarios and their impact on cost allocation and liquidity; and finally, the recognition that a new normal may be in place for sometime, as opposed to a sharp recovery. Fixed costs need to be balanced with future revenue considerations. Managers must be cognizant of the impact on their channel partners and supply chain. Smaller firms find it harder to raise money and may be unsustainably leveraged. The big worry is that a recession would push some over the cliff, leading to defaults and another blow to a deeply fractured financial system. India’s outstanding private debt from banks and NBFCs is Rs 110 trillion of which Rs 12-13 trillion is probably sour.

On the flip side, a crisis compels managers to reexamine their basic business models and look for new ways of doing things, for instance – work from home. Cost cuts are easier to accept and fat within the system, simpler to peel off. The hope is things will get better soon, but companies would be wise to plan for an extended period of disruption.

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Adit Jain, Editor