High commodity prices may not have much effect on Nifty FY22 earnings: report

A surge in most commodities over the past few weeks has put the spotlight on inflation, which many fear will negatively impact India Inc.’s earnings. Although the scenario may be true for non-baskets. Nifty, the earnings of the Nifty50 index could largely remain unscathed, a report by domestic brokerage firm Motilal Oswal Financial Services (MOSL) suggests.

Historical data shows that rising commodity prices had a positive impact on aggregate index earnings, MOSL said, and for the past 12 years, Nifty’s earnings have closely followed price developments. raw material.

“The scenario of higher commodity prices will only benefit 11 of the 50 Nifty companies, but their contribution to index earnings would be 36% in the current fiscal year (FY22).” In comparison, 13 components of Nifty that are negatively affected by rising commodity prices would only contribute 11% to the Nifty FY22 profit pool, ”the MOSL report said.

Among sectors, the negative impact on margins in the automotive, consumer staples and consumer durables sectors will be offset by higher profits in the metals, cement and oil and gas sectors , say their analysts. The IT sector, which accounts for 15 percent of Nifty’s weight, is largely insulated from commodity inflation.

“That said, the profits of the non-Nifty, non-commodity basket may be affected by weak demand in the economy due to widespread lockdowns,” the report added.

Globally, the prices of major commodities have jumped 70-100% year-over-year (year-over-year) after falling sharply at the start of the pandemic. Meanwhile, the prices of food and base metals are rising much faster than fuels and precious metals. Upstream companies will therefore be the main beneficiaries of this scenario.

While metal prices have moderated a bit late, analysts do not expect the trend to continue. “The recent drop in prices was triggered by China’s crackdown on speculative trading activity. Moreover, this is a necessary correction as prices have risen too too fast. But the correction is unlikely to last. long as demand is likely to remain dynamic and the metal cycle appears to be on a long boom cycle, ”said Dr VK Vijayakumar, chief investment strategist at Geojit Financial Services.

However, with the uncertain demand environment, companies would be reluctant to pass higher raw material costs on to consumers and would first exert other P&L levers to manage margins, MOSL added.

As for the BFSI segment, the most 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 be seen in improving the balance sheets of borrowers in commodity sectors,” MOSL said. According to her, companies could use the cash flow from rising commodity prices to pay off debts that might otherwise have deteriorated.

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