Time to look for inflation-proof companies - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Time to look for inflation-proof companies 

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In this issue:
» Should India raise its gold reserves further?
» 3G bids reaching irrational levels
» Indian private sector banks all set to use their pricing power
» Another financial crisis unfolding, says Jim Rogers
» ...and more!

Inflation is like a cancer cell. Its mention is terrible, and the gradual impact it has on the economic ecosystem is far more worrisome. Consumers do not like paying higher prices year after year. Same is the case with companies as well. They do not like paying constantly higher prices for raw materials they use. This is because the rise in input costs impacts profits. If companies hike prices to pass on the cost price rise to consumers, demand suffers. And if they don't, profitability gets hurt.

As we stand now, the impact of rising inflation is starting to show on corporate profits. From milk and sugar used by FMCG companies, to aluminium and steel used by auto companies, inflation is seen everywhere. And this is one big risk that these companies (and those from other sectors) face. The biggest question these companies face is - how to manage profitability amidst rising input prices.

For you, the investor, a good way to minimise the impact of inflation on your returns is to invest in companies that have the pricing power. Or the power to raise prices without hurting demand. Such companies might either be monopolies or have such strong brands that their sales are not affected even when they raise prices. In fact, for these companies, inflation becomes a reason that they use to raise their prices, and thus their profits!

01:02  Chart of the day
Today's chart compares the share of gold in India's forex reserves over the past sixty years. And as it suggests, the share is now almost at its lowest - just marginally higher than in 1980. This is despite the RBI buying a huge chunk - 200 tons - of the yellow metal from the IMF recently. The worrisome part is that India holds a majority of its reserves in US dollar denominated assets (bonds etc.). With the dollar tottering at its hind legs, keeping most of the eggs in greenback might turn out to be a bad proposition. So, should India raise its gold reserves further? Probably yes!

Data Source: SEBI Handbook

The bids for 3G spectrum are skyrocketing. This is as shown by data released by the Deptt. of Telecommunication. As per its report, the cost of a pan-India 3G license is nearing Rs 80 bn, or almost 125% higher than the base price of Rs 35 bn. Interestingly, this price is largely driven by a handful of circles. For instance, bids for Delhi and Mumbai have crossed the Rs 10 bn mark, up over 300% from the base price.

So, have the 3G bids reached irrational levels? It seems, yes! And with several days to go before the auction ends, there are chances that the bids will reach even higher levels of irrationality. This, we believe, can turn out to be a not so good proposition for telecom companies that are bidding such high levels for 3G. The penetration of this service is anyways not expected to be extensive enough. And over that, a higher spectrum fee would mean higher usage charges for subscribers, which can take this service out of the 'affordability' ambit.

Indian private sector banks are once again all set to use their pricing power. One, because they can! This is given their presence in more affluent areas and technology linked offerings as compared to the PSUs. Two, because they need to. This is given the RBI's mandate to calculate savings account interest on a daily basis leading to higher costs. Also, the banks need to provide more for NPA coverage as also factor in the additional cost due to expansion.

The annual results of the top private sector banks in the country, ICICI Bank and HDFC Bank show that the entities have been proactive in terms of pricing their loans higher. This is keeping in mind the RBI's tendency to choke liquidity to rising inflation. What is also clear from these banks' performance is that they are keen to ensure profitability even at the cost of growth. While the high margins may not be sustainable for long, they definitely come handy in terms of keeping the banks afloat in difficult times.

The US financial sector was the epicenter of the global financial crisis. Hence, the US government is keen on imposing more regulations on banks. Some experts believe that is not the way to go. Regulations imply that government will be willing to bail out the bankers if they were to still fail in the future. That will eventually create another financial crisis. But noted investor Jim Rogers is of a completely different view.

The financial crisis is already unfolding according to Jim Rogers. Government debt in Greece, Portugal, Spain and even the US is already a huge problem. As things stand today, one can already paint a very bleak picture. Hence, instead of worrying about future crises, the need of the hour is to fix the current one. That of the sovereign debt and government spending. In our view, while the condition is not quite as bad here in India, we must also pay attention to our fiscal deficit.

Noted investor Jeremy Grantham has also been equally scathing in his criticism of the global central bankers. He has written in his quarterly newsletter that 20 years is a recovery time in each painful crisis. However, Ben Bernanke and his predecessor Greenspan have treated public so well that the couple of crises in the past do not seem too bad at all. "So why not break the historical rules and try a third time? Perhaps this time we will be lucky," he opines. Clearly, all does not seem to be well with the US economy.

Anyways, Indian markets had a strong outing today. The BSE-Sensex was trading with gains of 80 points (0.5%) at the time of writing this. Buying in metal and banking stocks led today's rally in the broader markets. Most other key Asian markets also closed strong today, led by Hong Kong (up 1.6%) and Japan (up 2.3%).

Most of us go shopping when we have surplus cash in our bank accounts. However, this is not what the big technology companies around the world are doing. While through effective cost management, they've managed to amass huge cash reserves during the downturn, the merger & acquisition space has remained less vibrant. Not many big acquisitions happened during the worst of crisis. The cash-rich clutched their purse tighter in apprehension. And the sellers were not desperate to sell at low price.

Things were not much different here. The Big-3 of the Indian IT industry - TCS, Infosys and Wipro - had a cash-war chest of over Rs 200 bn as of March 2010. Despite such huge cash on books, most of the Indian IT majors like their global peers have shunned away from big-ticket acquisitions in FY10. Nevertheless, the Indian IT majors have been generous in sharing their profits with the shareholders. Nearly all major IT companies have declared decent interim and final dividends during FY10. We believe how these companies will use their cash will largely define their future growth.

04:59  Today's investing mantra
"Greed + Incompetence + A Belief in Market Efficiency = Disaster." - Jeremy Grantham
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9 Responses to "Time to look for inflation-proof companies"


May 3, 2010

Its a nice review, everyone has to think before investment. I appricate if you list inflation proof stocks




Apr 29, 2010




Apr 29, 2010

May I suggest Hind Uni Lever to be included in the list.
Currently out of favour of the analysts 10 year chart of this scrip shows a prolonged bull cycle. Up Up and Away ! Will equity master list out 10 inflation proof companies for the benefit of all subscribers?


B Satish kumar

Apr 28, 2010

In my view at present scenario all developing economies has to go through high Inflation till US Dollar becomes strong or stopping printing Dollar notes.

So, it will be better RBI should intervene to control Inflation by controlling Exchange rates against US Dollar.



Apr 27, 2010

While you have suggested that it is ideal to keep 5% of one's portfolio in GOLD, is it not enough if RBI also holds just above 5 % in GOLD on the total value of foreign currency assets? Do let me know if you differ on this.....Thanks and regards



Apr 27, 2010

Some ofthe inflation proof companies can be
a)Castrol,b)Proctor & Gamble, C) Britannia D) Nestle
F) Marico G) Glaxo Pharma H) Aventis I) Wyeth etc
None of them are cheap at present. I dont own any of them.
May be Equity master can suggest other companies

Jagdish Sanghvi
April 27,2010


Anupam Garg

Apr 27, 2010

no there cannot be any inflation free companies except the company of bhikaris...even they want Rs 5 coins these days


Anupam Garg

Apr 27, 2010

Companies must define a limit to profitability. The sole notion of outperforming analysts' expectations drives them 2 increase profitability 2 unrealistic levels, thereby forgetting the check in input costs

Totally agree with the chart

The mobile internet services aint tht bad without 3G anyway

This is the reason why pvt sector banks outperform PSB. SBI is largest simply coz its oldest

the problem is the word itself: deficit

cool mantra as expected


T S Cheluva rajan

Apr 26, 2010


Is there any list of businesses which are recession proof or inflation proof. If so please publish.

Warm regards


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