As most investors write off the current financial year amid the disruption caused by the Covid-19 pandemic, Aditya Narain, head of research at Edelweiss Securities is preparing for financial year 2021-22 as that’s when corporate India is likely to achieve normalcy.
He cautioned investors against expecting income and revenue to return to pre-Covid levels, saying companies will instead find their new normal. He also advised focusing on the demand mix seen by a company over the straightforward profit figure.
“FY22 will be very very interesting in terms of level and not the level of earnings but the level of revenue,” he told BloombergQuint in an interview. “Revenue is more reflective of demand and as I said it will be a question of topline and where it’s coming from.”
The profit, on the other hand, will show which companies are taking a knife to their costs, he said. Narain expects Indian companies to have taken maximum advantage of the cost revision opportunity provided by the disruption.
“Indian businesses are going to take a knife to their costs whether they need to or not. There are going to be guys who are struggling but for others it's going to be an excuse,” he said.
Companies that see demand from lasting sources and have managed to reduce their costs will benefit most, Narain said. While the current fluctuations in demand don’t show a clear trend, by FY22 investors will have to take a hard look at companies and sieve the ones with earnings potential.
As for earnings in FY22, Narain expects profitability to rise on the back of lower costs, even if revenues for some companies decline.
Watch the full conversation here:
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