Big companies to get bigger after Covid: BofA Securities

The infrastructure and real estate sector could witness the emergence of new asset owners such as sovereign wealth funds, pension funds and private equity players.

At a time when the world is grappling with uncertainties surrounding Covid, Bank of America (BofA) Securities has listed out some themes that will play out in the post-pandemic era. The foreign brokerage in its report stated that while the bigger companies would continue to gain more market share, the dislocation in the markets would further accelerate disintermediation of the wholesalers. It also added that new asset owners are likely to emerge in infrastructure and real estate, as liquidity would be tight and lenders would remain cautious.

Another big theme that the brokerage expects to gain momentum is the formalisation of jobs. Commenting on the ‘Make in India’, Amish Shah, India equity strategist, BofA Securities, said during a conference call, “Even if India does not succeed in getting a lot of global FDI, even if we work on doing import substitution that itself can be a big deal. On the import substitution part, we have seen progress large sectors such as consumer electronics. During Covid, the government realised that they should not rely for critical supply such as medicines on Chinese import, so they want to localise API and the intermediates used in pharma, on the back of that pharmaceuticals will potentially see progress. The recent announcements in the commerical coal mining and defence space could lead to import substitution in these sectors.”

Covid-19 is set to accelerate the pace of consolidation in favour of organised players. The report shows examples of some industries such as the air conditioning industry, retailing and home care, among others, the aforementioned trend was visible and the industry witnessed its market share tilt towards the top four or five players after demonetisation and GST. This is because higher compliance costs, plugging of tax leakages as well as liquidity issues have reduced the share of unorganised players since note ban and GST, said the report.

The report said the share of unorganised players across sectors still remains high providing ample scope for the continuing consolidation in favour of organised players.

After the Covid outbreak, companies are also more likely to reach out to their customers directly, and there would be a reducing use or disintermediation of wholesalers who dominate 30% to 40% of the supply chain, in the post-Covid era. They are mostly unorganised players who have a high cost of funds and operate on low margins. Given that retail sales are non-existent due to the shutdown, their capital could get stuck and they are likely to face a cash crunch which could accelerate their disintermediation. The wholesale channel was anyway under pressure from large format modern retail stores and tech, e-commerce driven new business models, BofA Securities said.

The infrastructure and real estate sector could witness the emergence of new asset owners such as sovereign wealth funds, pension funds and private equity players. “Infrastructure companies and real estate companies which are the most capital hungry sectors post-Covid are likely to become most capital-starved sectors, especially with banks and equity investors being more conservative in giving loans to these sectors which is supposedly considered to be risky business.

This is because infra and real estate companies sometimes operate at 70-80% debt equity ratio,” said Amish Shah.

This, the report said, is likely to trigger large asset sales in the respective sectors. Sovereign funds and pension funds want to invest in long-term assets which have a life span of 15-50 years and less risky assets which include operational real estate and infrastructure projects. “Sovereign wealth funds and pension funds are looking for assets which would give them a steady yield rather than growth. Once the sovereign funds acquire a large pool of assets they may look for infrastructure investment trusts or real estate investment trusts as structures to list these assets and then they will become a yield generating asset versus being considered as a growth asset,” Shah added.

In near term, BofA Securities expects Sensex companies to witness negative earnings growth of 7-8% in FY21 and 17-18% growth in FY22. “The markets need a trigger to perform from here on which would happen if the Covid-19 cases start to peak or there is a fiscal stimulus focused on pushing demand and capex,” said Shah.