The prices of commodities are on the rise around the world. But global commodity inflation will have a limited impact on Nifty shares, according to a note from Motilal Oswal Financial Services.
The brokerage looked at the historical impact of commodity inflation on stocks. “The rise in world commodity prices has historically had a positive impact on the earnings of the overall index over the past 12 years,” the note said.
The brokerage found that if the rise in commodity prices only benefits 11 companies (22% of Nifty constituents), the share of these companies’ profits in Nifty FY22 profits would be around 36% (vs. 31% in FY21E).
On the other hand, the 13 Nifty components that are affected by rising commodity prices would only contribute 11% to the Nifty FY22 profit pool.
The research note also mentioned that it would be difficult for companies to pass rising raw material costs on to customers. He therefore expects the auto, consumer staples and durable goods sectors to be affected in such a scenario.
“In the banking sector, corporate deleveraging has had an additional impact on credit growth. More importantly, the rise in inflation could signal the end of the monetary easing cycle, which has contributed to the steadily declining cost of financing the system, thereby generating healthy margins, â€the note said.
The metals and oil and gas sectors (upstream companies) would continue to be the main beneficiaries of rising costs.
“We expect the impact of higher commodity prices on the Nifty to be limited. The negative impact on automotive and consumer durables margins would be offset by higher profits in the metals, cement and oil and gas sectors. The IT sector, which constitutes 15% of Nifty’s weight, is largely insulated from commodity inflation, â€according to the research note.
Profits in the non-Nifty, non-commodity basket may be adversely affected given weak demand in the economy due to widespread lockdowns.
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