High commodity prices may not dent Nifty earnings, say analysts

Only 11 Nifty firms shall benefit from the current scenario but their contribution to index earnings will be far greater

Aspurt in the prices of most commodities in the past few weeks has raised concerns of a rise in inflation, which many fear could affect India Inc’s earnings. This may be true for the non-nifty baskets, but Nifty50 index earnings mayt remain insulated, suggests a report by Motilal Oswal Financial Services (MOSL).

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

“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 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,” the report said.

The adverse impact on the margins of the auto, consumer staples, and consumer durables sectors will be counterbalanced by an earnings uptick in the metals, cement, and oil and gas sectors, the report said. The IT sector, which constitutes 15 per cent of 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 70-100 per cent year-onyear (YOY) from a steep decline at the onset of the pandemic. Prices foodstuffs and base metals are seeing a much faster uptick than fuels and precious metals.

Hence, upstream companies will be major beneficiaries.

While prices of metals have moderated recently, analysts don’t expect the trend to sustain. “The recent dip in prices has been triggered by China cracking down on speculative trading. 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 VK Vijayakumar, chief investment strategist at Geojit Financial Services.

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

For the BFSI (banking, financial services, and insurance) segment, which has the highest weighting on Nifty, the inflation scenario 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. Corporates, it believes, could use the cash flows from higher prices to pay off debts that may otherwise have gone bad.