5 Indian companies best positioned to tackle the fear of inflation
What do you mean impact the stock market?
Commodity-dependent businesses have been impacted by rising commodity prices, while those selling finished goods or services have been impacted by rising transportation costs and wages.
This impacted their bottom line, causing some stocks to feel the heat. In fact, some of the top losers of 2021 were companies that struggled to generate profits as inflation emerged.
For example, Aurobindo Pharma and Hero MotoCorp shares both fell 21% during the year as their profitability was affected by rising raw material costs.
With inflation expected to hold up into 2022, it will be wise to look at the stocks of companies that are well positioned to resist it.
Here are five you can consider.
# 1 Kotak Mahindra Bank
First on the list is Kotak Mahindra Bank.
The bank is India’s third-largest private sector bank in terms of market capitalization. It offers financial services in the areas of personal finance, investment banking, life insurance and wealth management.
Kotak Mahindra Bank is well positioned when it comes to inflation, as a mismatch between the costs of loans and deposits would help increase interest margins.
In an inflationary environment, lending rates rise first while deposit costs rise with a lag. This bodes well for the banks.
The bank has also demonstrated a strong and consistent balance sheet over the years.
Kotak Mahindra Bank’s loan portfolio has grown at a CAGR of over 25% over the past decade. This was supported by a good contribution from low-cost deposits (current accounts and savings accounts).
As a result, the bank maintained very healthy lines of credit (NIMs). The use of technology has also boosted operational efficiency and enabled Kotak to increase profits in line with its growing balance sheet.
In its latest quarterly results, the bank’s net interest income (NII) grew 3% year-on-year while the net interest margin (NIM) fell to 4.45% as it changed its composition of loans in favor of low yielding assets (HL / wholesale).
The bank has become aggressive in the area of home loans in recent quarters. He also focused more on sustainable financing for businesses and consumers.
In addition, it has made significant investments in technology to revamp its business model and risk models.
# 2 HDFC
The next inflation-proof stock on our list is HDFC.
The company is the biggest among housing finance providers in India. It has also gained a reputation as a rock solid financial institution. Not only in India but around the world.
Like Kotak Mahindra Bank, HDFC is expected to benefit from the interest rate shift. In addition, its financial performance over the years makes it a value to be reckoned with.
HDFC has grown its loan portfolio at a compound annual growth rate of 20% over the past decade.
During this period, the entity has consistently maintained net interest margins (NIMs) of over 3% and kept its operating expenses under tight control.
During the September 2021 quarter, the company’s net interest income increased 14% year-on-year. Net interest margins stand at 3.6%. It also reported a 25% year-over-year increase in its net profit.
Individual loans and disbursements increased 44% year-on-year and 23% year-on-year, respectively, with demand for home loans strong in both the affordable housing segment and high-end properties.
The company’s management said it expects to end this year with positive loan growth. The growing sales momentum and the launch of new projects in the housing sector bode well for this.
# 3 Asian paintings
The third stock on our list is Asian Paints.
The company is the largest paint manufacturer in India and is also engaged in the manufacture of varnishes, enamels or lacquers, thinners, etc.
It has a dominant share of over 50% in the organized domestic paint market.
In the decorative paints segment, which accounts for around 70-75% of the Indian paint industry, it has a share of around 60%.
The company is one of the best stocks to hold in times of inflation because it has pricing power, that is, the ability to pass on rising input costs without affecting demand.
In the September 2021 quarter, the company’s net profit fell 29% year-on-year as high input costs squeezed margins. Its operating margin contracted from almost 11% to 12.8%.
To mitigate the impact of this still high inflation, the company has carried out a series of price increases. In 2021, it took more than 20% price hikes for all products. Despite the price increases, its revenue grew 32% year-on-year.
Going forward, the company’s management has said it expects inflationary trends to continue.
It aims to maintain its operating margin in the 18-20% range through a combination of cost savings and calibrated increases in product prices to offset rising input costs.
It seeks to improve the efficiency of the formulation by bringing technological innovation both in terms of formulation and manufacturing.
# 4 Nestlé
The third stock on the list is Nestlé India.
The company is a leading player in the Indian consumer goods industry and is a subsidiary of the Swiss multinational Nestlé SA, the world’s largest player in the branded and packaged food industry.
Like Asian Paints, Nestlé has pricing power due to its well established position in the industrial market.
In the September 2021 quarter, the company’s domestic sales grew 13.7% year-on-year, suggesting that it was not badly affected by the second wave.
It also reported a 5% year-over-year increase in net profit as it was able to pass on higher raw material costs.
Unlike many of its industry peers, Nestlé has been less affected by rising input costs as it has experienced price increases. Although this is not substantial, Nestlé has increased the prices of some of its packs by 1 to 3%.
Most FMCG companies have actually increased their prices, in response to the sharp increase in the costs of commodities, packaging and fuel.
Management said inflationary pressures are likely to be more acute in 2022, with global commodity prices for coffee, milk, oils and packaging rising to single digits.
It will continue to push price increases all the way to compensate for ongoing inflation.
# 5 Pidility
The last stock on our list is Pidilite.
The company is a market leader in adhesives, industrial and construction chemicals, and art materials. It holds more than 70% of market share thanks to its brands Fevicol, M Seal, Dr Fixit etc.
During the September 2021 quarter, the company experienced an unprecedented rise in commodity inflation.
Prices for vinyl acetate monomer, a key input, have tripled, as supply chain disruptions have added. As a result, the company’s operating profit margin contracted from 6.3% year-on-year to 20.9%.
The company has taken calibrated price increases and profitability measures to maintain margins in the 20-24% range. He expects commodity prices to remain high over the next six months.
Despite the price increases, the company has gained market share with unorganized and regional players given its ability to manage processes and the supply chain.
It recorded a 39.7% year-over-year increase in revenue for the quarter thanks to strong sales and volume growth in all segments and higher achievements. Its net profit increased 5.4% year-on-year.
Is inflation really a risk for your portfolio?
The general idea about inflation is that people earn less from their investments in real terms, that is, after adjusting for inflation. People also fear that higher inflation could lead to higher interest rates which could impact the cost of capital for investors.
While this is true, is inflation a risk to your portfolio over the long term?
In July 2021, Rahul Shah, Co-Head of Research at Equitymaster, conducted a study between inflation and stock returns to explore some of these concerns. We reached out to him to discuss his findings and more. You can read about it here – Is inflation really a risk for your portfolio?
Warning: This article is for informational purposes only. This is not a stock market recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com
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