Slump in consumer sector may boost PE investments: Report
New Delhi: As demand disruption and supply chain issues will severely impact revenue growth in the consumer businesses, it is likely to create investment opportunities for private equity (PE) firms, according to a Crisil report.
The disruption in demand, production and supply chain caused by the extended nationwide lockdown to contain the Covid-19 pandemic will knock back revenue growth by 2-4 per cent for the consumer essentials sector, and 16-30 per cent across discretionary manufacturing and consumer services this fiscal.
“And this is only in the base-case scenario of the lockdown ending in the first quarter of this fiscal. In case of extended vulnerability due to fresh extension of lockdown into the second quarter, the fall could be a steeper 30-40 per cent,” it said.
Discretionary segments such as household appliances, readymade garments and quick service restaurants will bear the brunt of the pandemic blow and see the steepest revenue declines under both scenarios as stretched working capital cycles will put a squeeze on liquidity and hurt profitability, it said.
These segments will also take the longest to recover post-lockdown, with discretionary spending taking up to a year to revive, asper the report.
However, e-retail and essential items will fare better, with lower decline in revenue, it said, adding that these will also bounce back faster, within a month, as consumers turn brand agnostic and switch to available local brands, and as e-retail platforms meet the need for contactless shopping and doorstep delivery.
The report said that with such severe impact and revenues plunging, valuations too will fall, delaying exits for private equity players from existing companies.
“However, the slump will throw up new bargains among consumer businesses with good long-term prospects, creating fresh investment opportunities for PE players,” it added.
Crisil Research expects the health and wellness segment to emerge as the key investible theme for PE investors.
Anjali Nathwani, Associate Director, CRISIL Research, said: “Consumer foods, QSRs, e-commerce and technology-based consumer services firms, which have been the favourites of PEs, are also the new favourites of consumers given their changing priorities. Within these segments, health and wellness-focused businesses such as online consultation and e-pharmacy will emerge as the key investible themes.”
Cloud kitchens is a segment that will attract PE interest as they will revive faster than traditional dine-in restaurants and have lower rental expenses, the report added.