Dominant Firms To Lead Earnings As Inflation Picks Up, Ambit’s Saurabh Mukherjea Says
Companies that can squeeze margins out of suppliers will do well as inflation rises.
Companies that dominate their markets—be it a large or a medium cap—will lead earnings growth over the next two years as inflationary pressures rise, said Saurabh Mukherjea, chief executive officer at Ambit Capital.
Companies with better market positions will be able to squeeze suppliers to protect their margins as inflation picks up in the coming 12 months, he said in an interview with BloombergQuint. Smaller companies will find it difficult to maintain their capital and cash flow as rising inflation leads to higher interest rates, he said.
While consumer inflation eased from a 17-month high to 4.4 percent in February, rising oil prices and consumption-driven demand will take inflation close to the upper limit of the Reserve Bank of India's range, he said. “The reason why financial year 2018-19 will see double-digit earnings growth, after five years of single-digit expansion, is inflation coming through strongly.”
India's economy is poised for a consumption driven GDP recovery. Cement and auto sales, and jobs data already show a pick-up. This should be aided by government spending in rural India ahead of the 2019 elections, Mukherjea said. The government has also promised 1.5 times of the cost of crops to farmers in the kharif harvesting season.
The elections, however, will not affect the markets. “It’s reasonably clear that underlying economic drivers of India have very little to do with what our politicians do,” he said. If the market does correct by 10-15 percent, it will only be a buying opportunity given that there is an economic recovery underway, Mukherjea said.
Watch the full conversation here.