Winners and losers amid government’s measures to control inflation
Premium- A cut in excise duty on fuel prices has a direct positive impact on the consumer, specifically the low-income group. This could boost purchasing power to some extent
Inflation has been a huge concern in recent months. In a bid to offer some comfort, the government has taken some steps. Excise duties on petrol and diesel have been cut. It has raised export duties on metals and lowered other import duties. Additional fertilizer subsidy of Rs1.1 trillion has been announced to cushion farmers against impact of rising global prices.
A few sectors stand to benefit from these moves, while others will suffer. First, let us take a look at the winners in this scenario.
1) Consumers: A cut in excise duty on fuel prices has a direct positive impact on the consumer, specifically the low-income group. This could boost purchasing power to some extent.
2) Consumer staples: “The fuel duty cuts/subsidies would be seen as positive for staples (relief to low-income households) and government’s stance clear on the bottom of the pyramid," said analysts from Jefferies India in a report on 22 May. This would offer some relief to fast-moving consumer staples companies that are facing the double whammy of rural demand slowdown and high input cost pressures.
3) Auto sector: Higher fuel prices were weighing on demand in the automobile segment, particularly the two-wheeler (2W) sector. With a reduction in fuel taxes, the total cost of ownership reduces thereby boosting demand. But there might be a slowdown in the shift to electric two-wheelers (2Ws) with a decrease in fuel prices coupled with recent instances of electric 2Ws catching fire. Further, the automobile sector, which continues to face commodity cost pressure, stands to benefit from levy of export duties on steel and reduction of taxes on imports as this could lead to moderation in domestic input prices. While all automakers benefit in varying proportions, analysts at Motilal Oswal Financial Services expect Ashok Leyland Ltd to be a key beneficiary as it purely caters to the commercial vehicle segment, which is currently seeing a cyclical upturn. Shares of Ashok Leyland are up by nearly 6% in the morning trade on Monday on NSE.
On the flip side, government’s announcements don’t bode well for some companies/ sectors. They are:
1) Steel: The imposition of export duties on steel does not augur well for the steel companies as it adversely impacts profitability. “We feel the measure is a year late and without any leeway to the existing exports contracts to export sans export duty. The current measure will impact the ability and will of the companies to continue with their long-term capex plans and will only commission the capacities where capex has been significantly committed," said analysts at Motilal Oswal in a report on 23 May. Unsurprisingly, stocks of Tata Steel Ltd, JSW Steel Ltd and Jindal Steel & Power Ltd are down by 12-16%.
2) Oil marketing companies (OMCs): While the end-consumer benefits from the drop in fuel prices, OMCs are foreseen to be affected to a certain extent. “The excise cut should help cool down auto-fuel prices and improve OMCs’ headroom to adjust prices and recover margins. However, as seen in Q3FY22, the current quarter will see significant inventory losses if retail selling price remains range-bound," said analysts from Emkay Global Financial Services in a report on 22 May. OMCs are Bharat Petroleum Corp. Ltd, Hindustan Petroleum Corp. Ltd and Indian Oil Corp. Ltd.
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Overall, such measures mean an increase in fiscal deficit. “We believe that the government may try to offset the fiscal impact by lowering discretionary spends (potential capex cut would be bad for Larsen & Toubro Ltd) and a greater emphasis on revenue measures viz privatization (good news for Container Corporation of India Ltd) and 5G auctions," added the Jefferies report