In this earnings season, ironically, most of the earnings commentary are less about earnings and more about evolving trends. With not much to offer on earnings for the current and next quarter, the management discussion is more about how the business would survive first (cost cutting, cash conservation, strengthening balance sheet etc.) so that it can revive later when the normalcy returns. For someone who wants to listen and track management commentaries, there is plenty on offer. In normal times, they come only in every three months. But now, because of April-May lockdowns, one gets to listen to the managements (vide earning calls) twice in the last 2 months, one for delayed March quarter results and another for June quarter earnings. In that sense, it is hectic times for fund managers and research analysts. As investment managers, we relish that.
Listening to the managements, there seems to be a pattern that is emerging across these calls. The objective of this note is to capture the common thread that cuts across these earning calls and present it in a curated form for better understanding of the Covid impact and the emerging outlook for many businesses, esp. in the broader small and mid-cap segment.
First, on the broader trend, every management is highlighting about the impending consolidation of stronger players in the market across the spectrum (small, mid and large-cap space) when the businesses revive. Marginal players with weak and questionable balance sheets (high debt) are likely to get weeded out (will not even survive to see the revival in the economy), paving way for the stronger ones to gain significant market share. Similarly, unorganized players will witness a huge churn with market shifting towards organized players in many segments. This is primarily arising from the inability of unorganized sector to get access to shrinking labor pool and its inability to overcome supply-chain and logistics challenges. What DeMon couldn’t achieve, Covid seems to be driving this shift. These two themes together (consolidation and shift from unorganized to organized) are likely to have a huge positive impact for strong listed players across the spectrum including small-caps.
Second trend is more interesting. Barring few, every management is talking seriously about China+1 strategy accelerating for global supply chains and about the trend of de-risking China imports in domestic manufacturing. While former will help in pushing exports in globally competitive industries like specialty chemicals, Industrial products, APIs, select niche garments etc., the later will help the import substitution industries in India. It will be interesting to watch how this will play in the coming years.
The third significant trend which is visible across the calls is on the rural theme. Various factors have miraculously come together to fire the rural economic engine. With bountiful rains, increased kharif crop acreage and Govt’s thrust on rural schemes (increased allocation for rural schemes like MGNREGA rural employment etc.), rural India is taking the lead on the recovery over urban and metros. Lower incidence of lock-downs and return of migrants have also added to the strength of rural story. Be it seeds, fertilizers, agro chemicals or any such rural related sectors, they are likely to be insulated from Covid impact.
In summary, there is a hope of resurgence next year for strong businesses across the spectrum of small, mid and large caps (with high quality balance sheets with low debt and cash surplus) after painful period of survival this year. This revival will be driven by above discussed consolidation and global China pushback, besides organic growth in the domestic economy. Hope this will bring huge rewards for patient long term investors in high-quality businesses.
Happy Value Investing!!!