Mumbai: Half of the components on the Nifty 50 index are likely to benefit from rising commodity prices and the rupee depreciation in FY22, according to a study by Motilal Oswal Financial Services. Metals along with oil and gas companies are direct beneficiaries of rising prices, while indirect beneficiaries include export-oriented sectors, especially IT, which benefit from rupee depreciation.
“At the Nifty index level, we observe that 29% of FY22 estimated profit pool is likely to be benefiting from rising crude and energy prices, while nearly 18% of the profit pool can benefit from rupee depreciation,” said Motilal Oswal in a client note.
The brokerage said only 9% of FY22 estimated profit pool is likely to be adversely impacted by the sharp spike in commodity prices, while 44-45% of profit pool is not directly impacted.
Prices of commodities from metals to farm products have shot up in the past one month following Russia’s invasion of Ukraine, resulting in a supply shortfall. Companies such as ONGC and Oil India may see an increase in their earnings per share (EPS) by 7-12% for every $5 per barrel rise in crude oil realisation.
“While the situation is still unfolding, the current spike in prices is unlikely to have a significant direct negative impact on index earnings at an aggregate level even as sector or stock-specific disruption plays out,” said Motilal Oswal Financial Services. “That said, if price spike sustains for longer, the consequent higher inflation and demand destruction could impact growth which in-turn could create downside risks to corporate earnings estimates.”
While the Nifty is down 11% from its peak in October last year, the broader market has witnessed a much sharper sell-off. After the recent correction, the Nifty is now trading at an estimated price to earnings (PE) ratio of 18.72 times, which is slightly below its 10-year average for the first time since November 2020.
“While the geopolitical and inflation-led uncertainties play out, post the correction, we find the price-value equation turning relatively more attractive, especially in the broader markets on a bottom-up basis,” said the brokerage. “The healthy earnings visibility can act as a cushion in an otherwise fragile external situation.”
The telecom sector is largely insulated from the geopolitical concerns and the related commodity price increase and foreign currency fluctuations. The rupee has depreciated nearly 3% against the US dollar so far this year and appreciated 1% against the euro.
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