• OUTLOOK ARENA
  • APRIL 20, 2022

4 Companies that Stand to Win Big as Interest Rates Rise...

4 Companies that Stand to Win Big as Interest Rates Rise

14 April 2022 was a historic day as the inflation reading in the US hit a 40-year high.

The inflation story in India is running on similar lines. As recent as the evening of 13 April 2022, India's inflation rate recorded a two-year high. And as inflation goes up, key market indices come spiralling down.

Needless to say, this had analysts coming up with their forecasts of how this will impact the stock market.

Of course, there are valid reasons for the markets to get unnerved. The Russia-Ukraine war is still ongoing. Crude oil has touched US$ 140 a barrel, the highest ever in the last 14 years.

But the point of worry here is that rising inflation is expected to be followed by skyrocketing interest rates.

From an investor's perspective, how can you make sure that your portfolio remains unaffected by this?

For the time being, it is best not to tinker too much with your existing holdings. Sitting it out is the best idea.

However, if you are looking to make fresh investments, it is best to explore sectors and companies that experience limited impact from volatility in interest rates and wider economic movements.

Here are the top 4 stocks that can deliver good returns even when interest rates are on an upward trajectory.

#1 ITC

Despite this hike in interest rates, India's massive domestic consumption market will continue to spend. The dilemma is - where will they spend?

As far as spending on daily necessities is concerned, the sector will witness limited pullback in terms of consumer purchases.

This automatically makes stocks in the consumption sector safe havens for investors in these turbulent times.

ITC is a top contender in this segment. The company delivered a strong performance across all its operating segments during the third quarter of the last financial year.

The conviction in this stock is strengthened as the company recorded a 100% year-on-year (YoY) growth in the third quarter of the financial year 2022 in its agri-business revenue.

The Fast Moving and Consumer Goods (FMCG) segment continued to be resilient with a 9.3% YoY growth.

One of the reasons for this robust growth has been a spike in the company's branded packaged and food segment in rural markets.

Sales of staples and convenience foods like Sunfeast Biscuits, Sunrise Spices, Aashirvaad Salt, and Aashirvaad Atta were key contributors to this growth story. This was followed by hygiene products that witnessed high market demand.

'Aashirvad Atta' consolidated its leadership position in the branded atta market. As worldwide supply chains faced disruption due to the Russia-Ukraine war, the company capitalised on the opportunity.

It exported massive quantities of wheat in the financial year 2022 to satisfy the needs of a global population reliant on supplies from the Black Sea ports.

ITC ventured into the booming plant-based proteins segment with new products that married the best-in-class research and development capabilities with the company's in-house culinary expertise.

These vegan products have had an encouraging response from urban markets as customer preferences continue to evolve.

ITC's FMCG business has continued to invest in enhancing its digital capabilities. The ITC e-store has become the company's exclusive platform offering consumers on-demand access to over 700 FMCG products across 45 categories.

ITC expects to maintain an EBITDA margin of 9% despite inflation in raw material costs. With a 12.5% PAT and its virtually debt free status, ITC should be on your watchlist of stocks that will benefit from a high interest rate regime.

#2 Tata Power

Energy stocks are under the weather as a result of the current inflationary pressures. In fact, many of the energy sub-sectors are right in the eye of the storm.

But these are short term challenges that should not deter investors from exploring this sector for long-term investment opportunities.

Overall, energy stocks tend to deliver good returns even when the price of crude oil is hitting the roof.

So, if you have energy stocks in your portfolio, now is not the ideal time to sell.

On the other hand, if you are looking to increase exposure in a segment that can bear the brunt of rising interest rates in the long run, then Tata Power should definitely be on your watchlist.

After a 190% gain from 2021, Tata Power has already proven to be a multi-bagger stock. The company's subsidiary Tata Power Renewables recently signed a deal with Black Rock Real Assets-led consortium that included Mubadala Investment Company.

This is a Rs 40 bn investment that will help the company fast track its growth plans and capture a leadership position in the rooftop and electric vehicle charging space in India for the next three years.

The timing is perfect when the world is looking towards reducing dependency on fossil fuels and moving towards renewable sources of energy like solar power and wind energy as a result of the recent conflict between Russia and Ukraine.

This has renewed investor focus on environmental, social and governance (ESG) stocks.

With many oil-rich West Asian nations looking to invest in India's green energy space, Tata Power is in a prime position to gain. With an experienced management team, the company manages one of the largest portfolios of solar and wind assets in the country.

It is evident that the company is looking to reorient with clean energy being the future of business growth.

Tata Power is already reaping a hefty 25% profit from its renewables energy (RE) division. Its exit from the coal mining business along with Mundra resolution and unlocking value through RE monetisation are some of the key catalysts for the stock.

Tata Power with its solid profit growth last year now sits at the forefront of the story where India is trying to position its economy for greater energy stability and a low carbon future.

With a sustained scale up committed to long term business growth and a favourable cost structure, Tata Power is a stock that you must look at in 2022.

#3 Sun Pharmaceuticals

We are not yet completely out of the throngs of Covid-19 that kept the world paralysed for over two years.

Given the circumstances, people are going to take care of their health both in good times and bad.

Healthcare is a basic necessity. Therefore, even when inflation is high and interest rates are skyrocketing, healthcare establishments will continue to function as normally as possible.

If you are looking to expand your portfolio during the regime of high interest rates, the healthcare sector can be on your list of considerations. Historically the industry is one of the few sectors to outperform when interest rates rise and will be in a position to weather the storm in case a recession hits.

When it comes to healthcare stocks, Sun Pharmaceutical is right on the top of the list. It has a leadership position with an 8.2% market share in the Indian market.

With gross sales of Rs 332.3 bn, the company is present across 100 countries in both branded and generic markets. It is among the largest Indian pharma companies that are expanding its reach in emerging markets. Currently, 67% of its sales comes from its international markets.

Sun Pharma currently operates 43 manufacturing sites globally with many of the facilities that are approved by various regulatory authorities across the world including the USFDA.

It has clocked a CAGR of 22% between 2006 and 2021. Sun Pharma is driving its plans to achieve sustainable long term growth by enhancing its share of the revenue from its specialty business.

The company also has plans to focus on technically complex products and has invested Rs 209 bn in research and development to date.

With a 91.3% profit growth over the last 3 years, Sun Pharma benefits from its strong market position, diverse product pipeline and geographical base. Sun Pharma's strong revenue growth, robust profitability and high promoter holding of 54.5% instils investor confidence in the company.

#4 HDFC Life

Precedence suggests that insurance companies have experienced positive growth in an environment of rising inflation and interest rates.

As a result of the linear relationship between the insurance providers and interest rates, the industry experiences more growth during these periods.

Rising interest rates will benefit insurance companies as they will be in a position to increase risk premiums for standard products. This will lead to steady cash flows, leading to more policy writing and overall favourable returns from this sector.

If you are convinced about the possibilities of long-term gains from the insurance sector, then consider adding HDFC Life to your investment watchlist for 2022.

HDFC Life Insurance Company is a joint venture between HDFC, India's leading financial conglomerate and Standard Life Aberdeen, a global investment company. The company insured 40 m lives in financial year 2021 alone. It has captured a 15.5% market share in the country.

The company plans to create long term value for their customers. To achieve this, HDFC Life offers a wide suite of products designed to address diverse customer needs at every stage.

Supported by a diversified distribution mix comprising our proprietary channels, and 300+ partners, the company is able to reach consumers across geographies.

With a focus on profitable growth, HDFC Life has been proactive to identify white spaces and tapping into opportunities to scale up business segments while maintaining a position of solvency at the same time.

Enriching the company's digital capabilities has been one of the key goals of fiscal 2021. Building market leading platforms helped HDFC Life achieve greater reach, efficiency, and agility in the market.

Despite the economic slowdown as a result of the pandemic, HDFC Life has been consistently rated as one of the top private sector insurance companies in terms of new business premiums closing the financial year 21-22 at Rs 2,010 m.

With a seasoned leadership team at its helm, HDFC Life has continued to deliver consistent and predictable performance in the financial year 20-2021 outpacing industry growth.

Investing in a High Interest Rate Regime May Not Always Be Bad

We all know that inflation is a reality of life. And the pattern of rising inflation is typically followed by rising interest rates.

Undoubtedly, there will be segments of the economy that will suffer. But as far as the equity market is concerned, this does not necessarily have to bring bad news for investors.

This is a great time to explore allocation in segments that are either beneficiaries of high interest rates or are resilient to them. If these sectors offer lower pricing, perhaps you may consider having an allocation to that.

Be smart enough to segregate between companies that are simply built on narratives as opposed to those that are backed by the strength demonstrated through compounded growth that you can see in their earnings and cash flows.

In the short term, be prepared to see some freefall in the quarterly profit and loss (P&L) in terms of margins. However, as trends go, prices will be back up as the economy stabilises and demands come back.

To know more, check out the below video by India's #1 trader Vijay Bhambwani where he zeroes in on the stocks to watch out for in 2022 when interest rates are high.

Happy Investing!

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