Benefit from spike in prices: Investment Plan

You can do little but wait for the rampage to end. High food prices are battering your monthly budget, stripping real returns from investments and pushing back immediate goals. You hope for news of fresh imports of tomatoes and onions. And add a good harvest to your wish list.

But waiting is a costly strategy. “The high food inflation is structural in nature. Therefore, it may last for at least five years,” says Saurabh Mukherjea, head, (Institutional Equities), Ambit Capital.

There is only one way out: You must launch a counter-offensive and wring out profits from inflation. Yes, it is possible to benefit from high food prices. The idea is backed by economic principles. For, inflation does not destroy wealth, only redistributes it unfairly. You may lose out as a buyer because the purchasing power of money is down, but sellers gain. Similarly, if you are a debtor, repaying a home, car or personal loan, you have the advantage over your creditor as the money you repay has lower value.

This concept is complicated and has wide-ranging macro ramifications. As ordinary investors, there is only one important takeaway: Inflation benefits some assets. You have to identify and invest in them.

As the current inflation phase is driven by food products, agricultural commodities and companies that provide agricultural inputs will benefit. These are your target investments. Here are a pick of the stocks, funds and commodities that experts are eyeing. Investing in them will do nothing to your monthly budget. But you will have reason to cheer when food prices shoot up further.

Inflation-friendly stocks

The agricultural input sector includes fertilisers, pesticides, seeds and irrigation systems. One company that has a finger in many of these pies is Rallis India. “It is well established in the fertiliser and pesticide business. Recently, it bought Metahelix Life Sciences for `99.5 crore which has strengthened its presence in seeds,” says Ajay Parmar, Research Head, Institutional Equities; Emkay Global. The acquisition may dilute Rallis India’s earnings in 2011-12. But analysts recommend the stock as they believe Rallis will benefit from the opportunities in the seeds industry.

United Phosphorus also boasts of a diverse portfolio. It deals in agro chemicals, phosphorus and phosphorus-based fertilisers, pesticides, etc. As the pesticide industry is free from government control, the company is expected to perform well in the coming years. It has enhanced its position in the pesticide industry by buying US-based Riceco LLC, a key pesticides player for the rice crop, for about `225 crore. But as United Phosphorus is cash-rich (about `2,000 crore as on September 2010) and Riceco is also debt-free, the deal should not pose problems.

Betting on pure fertiliser stocks is tricky as the government regularly intervenes. You can expect more interference with elections due in Bengal and Tamil Nadu. Recently, the Centre decided to continue with nutrient-based subsidy on fertilisers till March 2012. But it cut subsidy rates per kg for components such as nitrogen, phosphorus potash and sulphur. Subsidy for micronutrients boron and zinc are the same.

These changes will be effective from April 2011. Given that input prices are high, they might crunch this year’s margins of the makers of phosphatic and complex fertilisers such as Coromandel International, Zuari Industries, Deepak Fertilisers and Tata Chemicals.

The focus of increasing agricultural productivity is likely to benefit companies that produce high-yielding hybrid or genetically-modified seeds. “Even though overall irrigation, fertiliser and seed costs will rise, farmers will benefit from better yields of hybrid and genetically-modified seeds. This will create a good business opportunity in the seed sector,” says Akhilesh Tilotia, thematic analyst, Kotak Institutional Equities (KIE) and the author of the GameChanger report. Experts recommend investing in Advanta India and Monsanto India that are leading the pack in this sector.