Can rising Covid cases thwart contact-sensitive sectors’ recovery?

India on Thursday reported 3,303 fresh Covid-19 cases, the most in over a month, as infections continue to increase across countries led by the spread of the new Omicron XE sub-variant. With the uptick in cases, risks of a possible fourth wave and subsequent lockdowns continue to linger. But, market analysts believe the outlook for relevant sectors remains strong as the current situation is not alarming. According to Sachin Shah, Fund Manager, Emkay Investment Managers, the recent spurt in Covid cases is not serious. He is bullish on sectors that are part of the reopening. He says most companies are now running at full capacity and high occupancy, and consumer sentiment continues to be strong. From the pack, stocks of hotel companies such as Lemon Tree, Restaurant Brands Asia, Mahindra Holidays and Taj GKV have gained 4 to 14% so far this month as occupancy levels are healthy with wider vaccination coverage and ease in restrictions. Rating agency CRISIL expects a sustained recovery to result in a gradual improvement in the hospitality sector’s financial leverage over the medium term. “Strong pent-up demand for leisure travel, opening up of international and corporate travel, and wide vaccination coverage should catapult the revenue of the Indian hotel industry by 45% from a decadal low last fiscal, and almost match the pre-pandemic levels,” reports CRISIL. The agency further expects rebound in revenue and leaner cost structures to drive up operating profitability of the sector by 200-400 bps points this financial year vs FY2020. Apart from hotels, analysts are also upbeat on quick-service restaurants that have seen robust sales recovery in the last few months. Recent channel checks by brokerage Motilal Oswal indicated strong sales growth momentum for quick-service restaurants across all brands, similar to trends in February and March. “Reversal of restrictions continues to boost mobility, contributing to the healthy recovery in dine-in for both high-street as well as mall outlets.

Dine-in players are doing better, as expected, while delivery has not only sustained at much higher levels than pre-Covid but has also received a sequential fillip in April,” reads a Motilal Oswal note. That said, a trend of revenge travelling is also being seen across the board, which has improved prospects for airline companies as well. As per the Directorate General of Civil Aviation, around 1.06 crore domestic passengers travelled by air in March, nearly 38% up from February. The passenger load factor, which means occupancy rates, was also above 80% for all domestic private carriers during the month. Gaurang Shah, Vice-President, Geojit Financial Services, says he is bullish on Indigo from aviation and PVR from multiplex sectors. Airlines are passing on high ATF costs to consumers, he says. Inclination for binge travel is visible in high occupancy rates, while multiplexes across all cities are seeing better realisations, he says. Therefore, the outlook for contact-intensive sectors remains robust as the economic impact of each Covid-wave has been milder than earlier. However, the Street will monitor Q4 results of related companies in the days ahead to have a better understanding of the earnings recovery. Meanwhile, on Friday, big corporate names are slated to release their March quarter results including Maruti, Wipro, IndusInd Bank, SBI Cards, Ultratech Cement and Tata Chemicals. In addition, investors will closely monitor the US personal consumer expenditures index, and other global cues for market direction.

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