EQUITIES

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

India corporate earnings

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, 1QFY21F 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 FY22F, which is likely to bring with it stronger companies with better cost effective practices, newer innovations and 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.

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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 discretion