IT services, RIL among beneficiaries as digital dominates India Inc's commentary
IT services companies, automation firms and new economy plays like Reliance Industries Limited (RIL) will be the key beneficiaries of India Inc’s renewed digital push.
According to a research report by foreign brokerage Bernstein, "We tap into the combined wisdom of 40 top management teams, as we assess their commentary in recently released annual reports. We observed a few common themes - digitization, renewed focus on cash flow, cost efficiency and commentary on the uncertain demand environment."
Digital initiatives dominate in the annual reports as digital featured 451 times in RIL's annual report and 203 times in L&T's annual report. While digital has been a part of the strategy for most, it has received significant attention this time. Consumer companies want to tap into consumer analytics, to understand preferences, targeted marketing through digital advertising, enhance social media presence and adapt to online distribution.
Auto OEMs have enhanced online presence post COVID, to minimize physical touchpoints with some offering customization options. Financial companies are responding to digital initiatives - AI to help as a predictive tool and also help in hyper personalized offerings.
"Companies that embrace digital tools will eventually perform better than peers. Enablers of technology such as IT services companies, automation firms and new economy plays (such as RIL) are key beneficiaries, apart from those that embrace digital", the report said.
Another emerging theme is preservation of cash and cost efficiency. Most companies have embarked on cost cutting sprees over and above the usual cost focus paradigm. In addition, capex is being cut as the focus is on liquidity and cash flows.
"We believe that as demand recovers, margin improvement will sustain for a bit longer as companies cling on to risk aversion mode - and hence could become a near-term theme. Capex cuts are negative for the economy and for specific industrial-focused capgood companies", the report said.
There is also low visibility on demand. The report said top management are optimistic by nature, but it is different this time with most highlighting demand outlook uncertainty. Some point at impact on economy and consumer incomes as challenges while a few expect recovery to be quick when COVID normalizes.
"We sensed an optimism among premium auto plays and personal mobility as a potential driver from mass market plays. Consumer staple companies cited challenges on the demand front, with even HUL mentioning that "there are many unknowns today and hence, the near-term outlook is extremely uncertain"", the report added.
The report said that staples companies are however witnessing increased demand in health and hygiene categories and products such as tea and coffee. Companies are hence expanding product portfolios. IT companies believe that the discretionary part of spends could get cut while cement, steel and construction companies cited lack of visibility.
Telecom was an outlier with positive comments while IT services companies were the only ones to reinstate guidance post 1Q. "In our view, the response to COVID will ensure that as the recovery emerges, companies will report better than expected margins and cash flows for a few quarters until the gains are given up in a usual competitive business scenario", it added.
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