Words like ‘inflation’ and ‘prices’ figured over 300 times in the recently-released Monetary Policy Report of the Reserve Bank of India. The monetary policy committee left key borrowing rates unchanged but has decided to go slow on the ‘accommodative’ credit policy stance. Jamie Dimon, the chief executive officer at JP Morgan, the world’s biggest bank with a balance sheet size of $3.7 trillion (bigger than India’s GDP), wrote to shareholders that America has to raise interest rates and shift to ‘quantitative tightening. The US markets had not seen a positive day since 4 April 2022, when the letter was published.
India cannot stay immune to the inflation in the Euro area and the United States. However, finding sectors resistant to the external environment is not easy. In January 2022, this column spoke about the fast-moving consumer companies as one sector to find relief. The historical track record of consumer companies like Hindustan Unilever, Britannia, Godrej Soaps and others suggests that they can manage inflation better by passing on the higher input costs to consumers. That way, they have maintained their profit margins. However, consumer goods companies have underperformed the benchmark indices since 2022. Shares of Hindustan Unilever, Britannia shed nearly a tenth of their value since the start of the year.
The market signal suggests the traditional ‘bell-weather’ companies are likely to struggle to maintain profits. There is already a lot of analysis that consumer companies would continue to face inflationary pressure on input costs despite price hikes across product categories. However, it is not just high inflation that is hurting these companies. Most companies see ‘modern trade’ or placing products in supermarkets and on e-commerce websites like Big Basket, Amazon or Blinkit as a way to higher profit margins.
The chief executives of these companies have often spoken highly about the efficiencies that modern trade brings to the marketplace by cutting down on the distribution chain. However, there is a flip side to it. Private labels, owned mainly by the same e-commerce or big retail companies, are giving tough competition to the consumer companies. The persistently high consumer price Inflation further complicates the issue. As a consumer, you tend to opt for cheaper private label brands over established ones in the market.
In the consumer sector, that is called ‘downtrading’. When prices rise, most of us choose to save money.
For Hindustan Unilever, that challenge is not new. In the past, many regional brands have challenged the company in multiple product categories. However, the company could take them on the back of a robust distribution strength. For HUL, the nationwide reach in every district of the country was always a competitive strength. Modern trade does not keep distribution unique to HUL anymore. The surge in the number of private labels from retailers shows their popularity. It is a significant challenge for consumer companies ahead even when we are through with the top inflation concerns or the war in Ukraine.
What is relatively safer then?
Export-oriented sectors could continue to do better. IT services companies may find favour as the demand for cloud computing, digital transformation and significant data changes business processes. Large multinational corporations in the US would continue to rely on Indian software services firms to provide solutions that help them make those changes.
The other area of interest for investors could be the commodities sector. The metals sector could see demand rising as economies go back to everyday life. However, there are curbs on new capacity expansion in the industry following corporations adhering to the environment, social and governance or ESG norms. There are hardly any non-polluting ways to mine or manufacture metals and their finished products. There is a good chance that the profit growth in the sector could stay elevated.
Your investments need your support. This column has consistently advocated for you to be aware. There are dramatic shifts in previously understood concepts of ‘defensive’ stocks. Companies have to step back and figure out places where they can maintain competitive advantages. You need to do that regularly with your investments too.
(The author is editor-in-chief at www.moneyminute.in)