Teji Mandi Explains: Commodity upcycle unlikely to have significant impact on Nifty earnings
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As commodity prices continue to rise, there is no sign of inflation cooling off in the near future. The central banks across the world are likely to continue avoiding this for now. But if this trend sustains even in CY22, this is likely to pose a serious concern for monetary policymakers.

India has seen a very limited impact of inflation so far. Food prices have managed to remain stable despite the sharp rise in global food inflation. The share of industrial metals is also low at ~10% in computing the wholesale price index (WPI). Hence, it will have a minimum impact on overall inflation.

India has also benefited from the stable crude prices in the international market. Nevertheless, the situation could start turning very favourable for India if fuel prices also start rising.

Sector-Specific Impact

As per a Motilal Oswal report, the metals and oil & gas sectors are the biggest beneficiaries of the rising commodity prices. For every increase of USD 5/bbl in global crude prices, EPS for ONGC/oil India changes by 10%/16%.

The metal sector continues to use this current upcycle efficiently to reduce its leveraged position. The net leverage for steel companies is also likely to decline to <1.5x in FY22, which was as high as >5x at FY20-end.

Notably, the rising commodity prices in the pandemic have adversely affected the economic activities and spoilt the demand environment. Due to the negative consumer sentiments, the companies are also finding it difficult to pass on the rise in commodity costs. Auto, consumer staples, and durables sectors are looking at margin reduction in such a scenario. In banking, credit growth has impacted as large corporations have opted for debt deleveraging.

Muted Impact on Nifty Earnings

The adverse impact on auto/consumer/durables would be counterbalanced by an earnings uptick in the metals/cement/oil and gas sectors. The IT sector, which constitutes ~15% of the Nifty weight, is broadly insulated from commodity inflation.

Historically, rising commodity prices have managed to have a positive impact on the aggregate earnings of Nifty50 companies. Rising commodity prices benefit 11 companies in Nifty50, which constitutes 22% of the Nifty composition. The profit share of these companies would be approximately 36% for FY22. It has increased from 31% in FY21.

On the other hand, 13 companies in Nifty50 would be adversely impacted by higher commodity prices. Their combined contribution would be only 11% to the Nifty FY22 profit pool.

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