inflation | stocks to buy now: should we bet on sectors sensitive to inflation now? Sanjeev Prasad responds
The only thing that stood out from the second quarter commentary was inflationary cost pressures. How will India Inc. mitigate it and keep the margin trajectory? From an investor’s point of view, should we now turn to inflation-sensitive sectors?
The worst effect of inflation was seen on consumer names, whether it was autos, consumer staples or consumer discretionary that took the biggest impact. Otherwise, it doesn’t really matter in banks or the IT service industry, except for inflation seen on the wage side. Commodities companies are expected to benefit, given the sharp rise in commodity prices.
So the other sectors are generally good. But the consumer sectors have pricing power, especially consumer staples as well as discretionary goods. They will decrease the prices over a period of time. Obviously, it is not possible to increase prices significantly in a single quarter and many of them gradually increase prices from April itself and announce small price increases every one or two months. Since these are essential products, consumers have no choice but to absorb them. Otherwise, if consumer staples can’t raise prices, they are likely reducing grammage.
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So I am convinced that most of the consumer staples companies have pricing power to fight the sharp price increases on the commodity side. In the case of automakers, it is a bit more difficult because the demand environment has not improved in some segments but again, over a period of time, price increases will take place. Another good thing that has happened is that the government has drastically reduced the excise duties on diesel and gasoline and there is also a lower cost of ownership when it comes to automobiles. Overall, automakers might be in a better position to raise prices. Overall, it was a difficult time. The second quarter saw a slight compression of the gross margin and EBITDA margin for most companies in the sectors. But over a period of time, sufficient price increases will be made to mitigate the negative impact of other increases.
The other thing I wanted to talk about is reopening the business. From multiplexes to the hospitality industry to aviation, some of these stocks have recovered from their 52-week lows, but is the theme’s story still undervalued and can it extend to- beyond obvious names?
I suspect a lot of good news is being reflected now, as the multiples these companies have achieved may be far higher than they were before the pandemic. For example, the type of multiples that many hospital companies are currently trading on sounds like a lot of good news also takes note of the potential value creation in the online pharmacy space.
Apollo was a stock of 40 EP on a 12 month basis prior to the pandemic. This has risen to 70-80 now on a 12 month prospective basis. Other stocks that were previously 35 EP have now become 75 EP. The multiples come to extend beyond the comfort level in many cases.
I do not know in what proportion of the recovery in volumes the committee of analysts is currently betting. In our case, we remain cautious on volumes assuming that travel, tourism and hospitality would return significantly over the next financial year. The Covid situation in India has improved significantly. The theme is almost intact. There is no doubt about it, but a lot of good news and much more is factored into some of the parts of the opening trades.