High commodity prices may not dent Nifty FY22 earnings much

The adverse impact on the margins of auto, consumer staples and consumer durables sectors will be counterbalanced by an earnings uptick in the metals, cement and oil & gas sectors.

A spurt in most commodities over the past few weeks has brought the spotlight back on inflation, which many fear will adversely impact the earnings of India Inc.

While the scenario may hold true for the non-Nifty baskets, the Nifty50 index earnings may largely remain unscathed, suggests a report by domestic brokerage Motilal Oswal Financial Services (MOSL).

Historical data shows that rising commodity prices have had a positive impact on aggregate index earnings, MOSL said, and since the last 12 years, the Nifty earnings have closely tracked the movement in commodity prices.

"Rising commodity price scenario will benefit only 11 companies out of the 50 in the Nifty, but their contribution to the index earnings would be at 36 per cent in the ongoing financial year (FY22).

"In comparison, 13 Nifty constituents that are adversely impacted by higher commodity prices would contribute just 11 per cent to the Nifty FY22 profit pool," MOSL report said.

Among sectors, the adverse impact on the margins of auto, consumer staples and consumer durables sectors will be counterbalanced by an earnings uptick in the metals, cement and oil & gas sectors, their analysts believe.

The IT sector, which constitutes 15 per cent of the Nifty weight, is broadly insulated from commodity inflation.

"That said, earnings in the non-Nifty, non-commodity basket may be adversely impacted given the weak demand backdrop in the economy due to widespread lockdowns," the report added.

Globally, the prices of key commodities have surged between 70-100 per cent year-on-year (YoY) from a steep decline at the onset of the pandemic.

Meanwhile, food prices and base metals are showing a much faster uptick than fuels and precious metals.

Hence, upstream companies will be the major beneficiaries in this scenario.

While prices of metals have moderated a bit off late, analysts don't expect the trend to sustain.

"The recent dip in prices has been triggered by China cracking down on speculative trading activity. Also, this is a much-needed correction since prices have run up too much too fast.

"But the correction is unlikely to last long since demand is likely to remain buoyant and the metal cycle appears to be on a long expansionary cycle," said Dr VK Vijayakumar, chief investment strategist at Geojit Financial Services.

However, with the uncertainty in the demand environment, corporate would be reluctant to pass on the rise in commodity costs to consumers and would first exercise other P&L levers to manage margins, MOSL added.

As for the BFSI segment, the highest weighted sector on Nifty, the inflation scenario (triggered by firm commodity prices) could have mixed implications.

"One of the indirect benefits of rising commodity prices could manifest through the better balance sheets of borrowers in the commodity sectors," MOSL said.

Corporate, it believes, could use the cash flows from higher commodity prices to pay off debts that may otherwise have gone bad.

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