They are intimidating to upend the most substantial bull run in 11 financial years as investors set their expectations for sustained earnings recovery.
The sharp rally in commodity prices, triggered by enthusiasm about a global economic recovery, could seriously depress India’s corporate earnings in the upcoming quarters and make current stock valuations look increased, analysts stated.
Prices of commodities like crude oil, metals, palm oil, wheat, barley, and copra, which value a significant part of the input costs of Indian companies, have grown. Some companies have increased the prices of goods to offset rising costs, endangering a drop in demand, while others have chosen to absorb them.
Increasing commodity prices generate inflationary pressure
If the commodity price inflation proceeds, the Reserve Bank of India (RBI) may be required to normalize its comfortable liquidity stance earlier than expected, reducing its efforts to sustain economic growth.
Deepak Jasani, retail research head, HDFC Securities, stated that increasing commodity prices generate inflationary pressure, which could be a danger to markets. Persistently high inflation may force the central bank to relook at interest rates. If companies cannot pass on the price hike to customers, enormous input costs or raw material expenses will press companies’ margins or reduce capacity utilization.
Though March quarter earnings are expected to be firm on a low base, fewer coronavirus cases, record winter crop sowing, and enhanced consumer sentiment, the commodity price impact would be relatively straightforward for individual companies, announced analysts at Motilal Oswal Financial Services.
Most consumer companies’ price hikes earlier in the year and during the quarter, coupled with continued stringent cost-control measures, should offer some comfort from the sequential inflationary trends seen in most commodities.
Most companies in the sector have continued ad spending and brand investments but are anticipated to continue reducing discretionary spending as part of their cost savings applications. They announced in a 9 March note to clients.