It’s strong fundamentals that help companies survive a recession, and then thrive

Recessions usually lead to Darwinian conclusions — some survive them, while many don’t. But those that do have all the key attributes of the fittest — strong balance sheets and adequate cash reserves. And their owners might want to own more of themselves through buybacks.

Companies such as ITC, Maruti, Eicher, Bajaj Auto, ACC, Cummins, M&M, Castrol, Nalco, and Infosys have huge cash on their books, and they can allocate financial resources to different avenues for maximising profits and increasing efficiency once the economy begins to revive.

“Given the heightened uncertainty, we believe corporates will not be in a hurry to invest in capex in the foreseeable future,” said Gautam Duggad, head of research, Motilal Oswal Financial Services. “Assessing the price-valuation damage in Nifty, many companies are now trading at multi-year lows and valuations. Thus, the recent sharp correction in stock prices may provide an opportunity for a select few cash-rich companies to augment shareholder returns through dividends or buybacks.”

Buybacks in the near-term are ruled out as liquidity on the balance sheet will now be of paramount importance to run businesses in the short term due to the nation-wide lockdown and consequent collapse in revenues. Several big companies in the US and Europe have cancelled their buybacks due to the worsening environment after the outbreak Covid-19. But once the government lifts the lockdown, companies with strong cash positions are the potential buyback candidates, said analysts.