Even as lockdown lifts and India gets back to work, here’s where FY21 corporate earnings are headed

Updated: Jun 16, 2020 8:57 AM

If history is any indicator, Indians have had the unique ability to adjust and adapt to circumstances and carry on with life post any crisis

India corporate earningsThe more businessmen and corporates we speak to, the more they seem to agree that FY21E is largely about surviving and the focus remains on balance sheets rather than growth or profitability

By Manish Jain

As investors, we are all at an interesting crossroads…while there is optimism in the air as the nationwide lockdown starts to lift and the economy starts getting back on its feet, at the same time the question remains – what happens to earnings growth and subsequently our investments? We are now staring at what might be a bumpy FY21, but the optimism surrounding FY22 recovery still remains and this may not be unfounded either. As the lockdown lifts and India gets back to work in FY21, things will improve gradually but surely through the year. In that respect, 1QFY21E is likely to be the worse and growth trajectory should ideally pick up from there significantly. That said, FY21F is still likely to be a year of reset and hence we would shift our focus to FY22E, which is likely to bring with it stronger companies with better cost-effective practices, newer innovations and a strong possibility for market share gains. But it won’t be equally rosy for all – a lion’s share of the growth/gains will go to “Good and Clean” companies with healthy balance sheets, low leverage and the ability to employ labour and capital effectively towards meeting important business or consumer needs.

The more businessmen and corporates we speak to, the more they seem to agree that FY21E is largely about surviving and the focus remains on balance sheets rather than growth or profitability. However, as we look towards FY22E and beyond the view is unanimously filled with hope and positivity for companies across various sectors, which would survive through the tough times.

If history is any indicator, Indians have had the unique ability to adjust and adapt to circumstances and carry on with life post any crisis. This unique ability to adapt and innovate gets us going through tough times much faster than our own initial estimates too. Case in point is demonetisation-it was a tough time no doubt, but the gloom and doom was overdone and not all companies were impacted equally, the stronger players not only survived but also thrived post the crisis and there is no reason that this time would be different.

With this overall outlook in mind and the data available to us today, we think it would not be an exaggeration to expect a strong recovery in high quality “Coffee Can” companies’ earnings in FY22. Growth could not only be much faster than peers, but also much greater than previously expected. I think most readers might find the prospect of medium to strong earnings recovery in FY22 acceptable.

It is FY21 earnings that is a cause for concern for most corporates, businessmen and analysts alike. However, while this concern is justified in the case of (1) Highly leveraged companies, (2) Travel and tourism companies and (3) Entertainment related companies, it is grossly exaggerated for strong balance sheet companies with sustainable competitive advantages. Some of these companies would see sharp recovery as soon as 2Q FY21, some of this will be driven by increased consumer spending as people gradually but surely begin moving back to normalcy (even if the new normal). An increase in consumption is inevitable, as it was artificially brought down to low or near zero levels forced by the lockdown.

At Ambit Asset Management, across our three funds, we have had a good exposure to chemicals, pharma, diagnostics, IT and consumer staples companies, which have managed to escape relatively unscathed and even outperform in some instances. Amongst companies in short term impacted sectors or those that would emerge stronger like consumer discretionary we feel some of the initial spending can be directed towards consumer appliances, electronics, two wheelers and auto. While financials have been beaten down and we own some of the names here, we see no reason why high quality banks, NBFCs and Insurers, which were also prudent risk managers during this crisis should not come out stronger as the sector consolidates and weaker players get weeded out. Some of the remaining sectors like Infrastructure, oil and gas, metals and power/utilities might take much longer than others to recover, we have zero exposure to these sectors.

Last but not the least, our focus on long term investing, high quality earnings growth companies with strong franchises and sustainable competitive advantages makes us feel fairly confident of the future, the opportunities it brings and our ability to capitalise on these given our portfolio positioning. Time in the market will prevail over timing the market specially this time around, given the bombardment of multiple sets of data on a daily basis from around the world. The key message to all is to stay invested and keep investing, as equities will outperform all competing asset classes by a big margin over longer time horizons and this opportunity and these prices would not be available to those who are awaiting things to normalise completely before making any investment decision.

(Manish Jain is a fund manager at Ambit Asset Management. Views expressed are the author’s own)

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