In this article we would discuss the impart of COVID-19 on Valuation. The COVID-19 or New Coronavirus Disease which was first found to have infected a fish-seller in Wuhan a city of Hubei province in China in December 20191 has created a deep and far reaching impact on world economy and also Indian economy. Till January 2020, it did not spread much out of China. In India on 30th January 2020 first case was reported in the Kerala State2. Two more cases were reported in Kerala on 3rd Feb. All these 3 cases were students who had come directly from China. Till March 2nd week the situation in India was almost under control with slow increase in the cases. First COVID-19 victim was reported on 12th March 2020. So everybody was under the impression that this decease would move out like other deceases such as bird-flue or SARS and we Indians won’t get affected much.
In the month of March as the decease started spreading across the globe, number of travellers started returning to India and few of these returning travellers were potentially infected. Initially they did not take the home quarantine / self-isolation seriously, so persons who come in contact with them also became susceptible and became either carriers or patients. Considering this, the government of India first requested Indian citizens to have “Janata Curfew” and then lock-down was introduced from 23rd March 2020.
The lockdown declared by Government Of India is for complete India and restrictions are imposed on the movement of citizen throughout India. This lock-down involved:
Since all the manufacturing companies had to stop production, they told their permanent staff to work from home in terms of carrying out as much paper work related activities, trainings, etc. as possible.
Due to various reasons all the manufacturing companies have started appointing contractual workforce and it has been steadily increasing since inception of this concept in the decade of 90. It is estimated that Indian companies employ contract labour upto 70% to 75%3 & 4 in non-agriculture sector. Most on these contract workers or labour force work are migrated labours from rural India and also work at low wages without job security. Due to lock down all these contract labours who cannot sustain their daily leaving in cities or were staying in small houses had to return to their native places in rural India. This has created lot of exodus from cities to rural India. Due to this valuation of residential assets used by these people in urban areas would come down.
One more thing about these contract labours is generally most of them visit to their native places in rural India in summer or rainy seasons. Since the lockdown period is just before the summer, it is expected that most of the contract labours won’t come back to work even if the lockdown is lifted till either end of summer or mid of monsoon period.
In the rural India the agriculture production of cereals and pulses in rabbi season is not much affected due to good rains in last monsoon. Farmers are also getting good fruits and other perishable goods production but due to lockdown they are not getting transportation means and hence the farmers have to discard their perishable agricultural goods and they are facing losses. Due to some rumours related to COVID-19, people have stopped purchasing chicken and eggs and it has affected the whole poultry industry.
If we look at the overall scenario across the globe then as on end of 1st week of April 2020, COVID-19 has been spread across 150 countries and has affected badly the G-20 countries with huge casualties of precious human life. Counties in third world which administer BCG vaccines to their new-borns and where malaria is predominant have lesser infections and hence lesser casualties.
Valuations are carried out mainly for:
Let us understand the points impacting valuation of properties owned by individuals first and then organizations.
Due to mass exodus of contract labours from cities to upcountry areas, the demand for houses related to low income group in the cities would get reduced temporarily. It may increase slightly in the upcountry side. Due to the experience faced by these labour force going to upcountry, they may like to work in upcountry. But due to various natural events and factors out of control of human, the agriculture produce and the side business such as poultry farming, etc. may not sustain that population. So the demand for agriculture land may not increase as much.
The organizations are mainly into manufacturing or secondary and service or tertiary sector have stopped most of their activities. Let us discuss each point one by one.
Abrupt Stopping Of Plants has impact on Valuation Of Plant & Machinery
The manufacturing companies have been stopped abruptly. The author spoke to many professionals in manufacturing sector across India and understood that in spite of these companies having man-power in form of their own employees (non-contractual), these employees are not allowed to go the factories to maintain the machines. So the condition of the machines is unknown. Hence once the lockdown is lifted it would take some time to access the current condition of plant and machinery at that time and then make them in working condition.
Supply Of Raw Materials
In current scenario as the global supply chains have been developed, manufacturing units are getting impacted due to issues affecting any one supplier which may not be in their own country. For example, let us take 2 examples one of big item and another of small manufactured item.
Think of a car getting manufactured. As the car requires many parts, some of the parts say tyres, head-lights, electronic chips, circuitry, etc. are sourced from other countries. As there is lock-down in most of the countries and production in those countries getting affected, the sea-liners getting affected, etc. the supply of these parts may not happen in early phase of lifting of lock-down. Even if the car is produced, it may not be rolled out due to lack of say headlights or tyres or lack computer chip controlling the engine. So whole of the production would be stopped.
If we think of small plastic item, then most of the raw materials for making that plastic item is getting imported from China, so we may not be able to make our own small plastic items as well.
From the above, we can derive that even if the machinery in the plant starts working, raw material supply chain has to function and it could adversely affect the production.
Supply Of Labour would reduce Valuation of Real Estates in cities
As the contract labours have gone to their native places, they may not return back before end of summer and in some cases before Dassera as they would be cultivating their farms in their native places. So even if machine starts, raw materials are in place, getting the experienced labour force at cost effective rates could be an issue. This may temporarily increase the labour costs and increase in the production costs.
Demand Creation
Due to lockdown most of the Indian citizens have gone into conservation mode and have become thrifty. This trend may continue for next few months / quarters. So barring essential goods, the demand for all other goods may not be created. Same is the scenario in many countries. So even export for non-essential goods would be reduced creating pressure on the margins of the companies producing such items.
Finance To Run The Business
Major employment generator in India is MSME sector companies5 and in financial year 2018-19 the MSME Companies have given jobs to about 11 Cr. people. All these MSME companies work on thin margins and may not sustain the lock-down effect. Unless some package is given by the government, many of them have to wind-up their businesses creating more unemployment.
Large corporates have access to finances in terms of loans, etc. but considering the other points mentioned above, even these large corporates would feel straining of their finances as well as giving salary to employees who are working from home and paying the taxes. This would definitely have huge impact on valuation of assets.
Exports
As most of the economies are facing lockdown and similar issues, export of non-essential items is almost frozen leading to drying up of the vital foreign exchange. This lack of export will reduce the cash flow in our country to that extent. May be software, BPO, KPO, etc. exports could be working to support the essential services in those countries.
Government Spending
Government has declared many schemes to feed in the underprivileged people and enhancing the capacity of medical treatment to thousands of suspected patients and quarantined people. So with this, we cannot expect the government would spend more.
Bank Interest
RBI has reduced Repo rate, reverse repo rate as well as CRR making more cash available in the market at cheaper rates. This could be a boon to many organizations as they can access more funds at cheaper rates and finance their activities at cost effective rates.
After the lock-down is lifted there could be inflation in essential commodities (CPI) but the WPI may not see that much increase or for some items may get reduced.
As stated above let’s discuss the impact of all the above points on valuation of assets. First let’s discuss about the impact on assets of individuals. Individuals own tangible as well as intangible assets. With low income group people getting affected mostly as they have smaller savings to rely on, the values of houses for low income group or affordable house projects would take a more deep. With reduction of cash in the market, crashing of stock market and manufacturing as well as service sector getting badly affected, the HNI would not look for investing in properties. So even value for luxuries residential properties the investment may not come through and the value of those properties would get corrected highly. The value of residential properties related to middle class may not see much correction.
As regards to the valuation of tangible assets for the companies, since most of them are not used and maintained during lock-down period, those assets may get deteriorated fast so need more resources to bring them to good condition. Considering this, the valuation of the tangible assets for the companies could get reduced up to 10%. Also there could be more supply of assets than actual demand for the assets. So in case of resale market the value could be even less as there would not be much buyers post the lock-down. The non-tangible assets of the companies have already been reduced in stock markets. Same trend may be seen in privately placed non-tangible assets of the organizations.
Only thing which could appreciate in and after lock down would be gold and gold jewellery as even banks have reduced their interest rates and common people think gold as safe bait.
Lockdown and social distancing has created unimaginable problems, which could lead to drastic change in the asset prices and hence valuations. So we, values have to be ready with our individual assessment of the situation and carry out the valuation activity impartially in the best interest of the profession.
Author is a Chartered Engineer or CEng in Mechanical Engineering Field and also a registered valuer with IBBI as well as Government Approved Valuer with Income Tax Department under Wealth Tax Act. Section 34AB
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