Soaring inflation led by the Ukraine war is likely to have an impact on the margins of India Inc. The initial two-quarters of FY23 is likely to see a sharp margin impact and corporate commentaries are likely to worsen before they get better, says Nitin Shanbhag, Head- Investment Products, Motilal Oswal Private Wealth in an interview with Nishant Kumar of Mint Genie.
Edited excerpts:
The market seems to have many headwinds in the new financial year in terms of rising input costs of companies, geopolitical issues, and policy normalisation. What is your outlook for the market for FY23?
At the beginning of the calendar year 2022 (CY22), our stance was that this year is likely to be one of consolidation given the strong rally that the equity market had witnessed over the previous two years.
While the impact of US Fed policy normalisation and rising inflation were being assessed by markets, the Russia-Ukraine conflict followed by sanctions and the rise in crude prices has led to heightened volatility, which is likely to persist till the conflict is resolved. In such a scenario, raw material prices are likely to remain elevated.
While the benchmark index Nifty50 has not seen many downgrades thus far, due to upgrades in metals and oil & gas, and neutral to no impact in BFSI & IT, the broader market is clearly bearing the brunt of rising inflation.
The initial two-quarters of FY23 are likely to see a sharp margin impact and corporate commentaries are likely to worsen before they get better.
If the input cost situation does not improve and further price increases are initiated by companies, especially in the consumer sector, there may be some impact on demand.
Hence, largecaps could remain relatively rangebound in FY23 with higher volatility being felt in mid and smallcaps.
FY23 could well be a year of accumulation for equity investors, the benefits of which are likely to be witnessed going forward.
Economy is showing mixed trends. GST collections are hitting record highs but many rating agencies have lowered their growth forecast for India. What is your take on India's macro?
The primary impact of the ongoing geopolitical conflict is the increasing supply-side risk and rise in crude oil prices. Hence, it is important to assess sensitivity to India’s CPI inflation, CAD, fiscal deficit and GDP growth.
A 15 percent increase in global crude oil forecasts means a 10 percent hike in domestic prices (pass-through is only 66 percent as per an RBI study). Assuming full pass-through to final consumers, this means an increase of 45-65 bps on CPI.
Assuming that RBI allows the full pass-through of higher crude oil prices to India’s current account, an increase of USD 10 per bbl in international crude oil prices implies a worsening CAD equivalent to 0.4 percent of GDP, with a similar impact on fiscal deficit.
This could likely mean GDP growth of around 6.5-7 percent in FY23, hence the economic forecast downgrade is not surprising.
However, the longer-term vision for India’s macro remains positive with gradual progression toward a USD 6 trillion economy over the course of this decade.
What are your expectations for the India Inc. Q4 earnings?
Autos, consumer staples/durables, and cement have been the most adversely affected sectors due to rising commodity & energy prices, hence could witness an impact on gross margins.
On the other hand, metals and oil & gas have been direct beneficiaries, while BFSI & IT have been neutral.
For Nifty50 companies, for the FY22E profit pool, around 29 percent is estimated to benefit from rising crude and energy prices, and nearly 18 percent is likely to benefit from the rupee depreciation. Only 9 percent is likely to be adversely impacted while 44-45 percent of the profit pool is not directly impacted.
What are your views on consumer durables and FMCG space as there is a risk of narrowing margin due to rising input costs?
As mentioned earlier, these sectors are likely to bear the brunt of rising input costs and the earnings could see some downgrades in aggregate over the next couple of quarters before they start to recover.
What could be the impact of recent geopolitical developments on Indian IT firms? Do you expect the demand scenario to moderate?
There is unlikely to be any immediate impact on IT firms.
