Apart from rising geopolitical tensions in West Asia, another topic with rising chatter these days is inflation.
Inflation rarely announces its arrival. It creeps in quietly, first with slightly higher grocery bills, then costlier fuel, rising rent, and before you know it, the same salary starts feeling smaller every month.
For most businesses, inflation is a problem. Rising input costs squeeze margins, demand weakens, and profits take a hit.
However, a select group of companies thrive in such environments.
These are businesses with strong pricing power, essential products, and demand that barely change even when prices rise. For investors, such businesses can act as a shield when inflation starts to climb.
Let’s look at four such companies…
#1 HDFC Bank
HDFC Bank is India's largest private sector bank by assets and market capitalisation. It has grown to become a systemically important bank known for a wide range of banking services, including retail, wholesale, treasury, auto loans, personal loans, credit cards, and its digital products.
During periods of rising inflation, banks like HDFC Bank can actually benefit as higher interest rates often lead to better lending yields and improved net interest margins.
This ability to reprice loans while maintaining strong asset quality helps the bank sustain profitability even in an inflationary environment.
HDFC stands to benefit from this lag in interest rate transmission. Its consistent financial performance over the years makes it a stock that investors rely on.
Over the past five years, the bank’s sales and net profit have grown at a compounded annual growth rate (CAGR) of 22.5% and 21%, respectively.
Its return on equity (ROE) has averaged 15% during the same period.
The bank’s superior asset quality compared to some other banks, efficient debt settlement, and expanding corporate banking segment contribute to its solid fundamentals and profit growth outlook.
Additionally, HDFC Bank's expanding presence in retail, rural, and semi-urban lending, along with ongoing digital transformation and technological innovation position it well.
The bank expects to increase its advances in line with the industry in FY26 and to exceed industry growth in FY27.
#2 Nestl India
Nestle India is a subsidiary of Nestle S.A. of Switzerland. The company has more than 2,000 brands ranging from global icons to local favourites. It’s a 100-year-old, and the second largest FMCG company in India.
Some of the famous brands of the company include Nescafe, Nestle Everyday, Sunrise, Maggi, KitKat, Milkybar, Milkmaid, Nestea, Munch, Bar One, and Polo.
Companies like Nestlé India tend to perform well during inflationary periods because they sell everyday essential products with strong brand loyalty.
It gives them the ability to gradually pass on rising input costs to consumers without significantly impacting demand.
Nestle has performed well financially. Over the past five years, it has maintained an average ROE of 81% while its ROCE has averaged 113% during the same period. Its five-year sales and net profit growth have compounded at 9% per annum.
Nestle India is expanding its distribution reach in the noodle segment, targeting 6 million outlets.
Beyond traditional export markets, Nestle is also vying for new opportunities in regions such as Africa, Latin America, and parts of Eastern Europe. The demand in these markets looks affordable and is rising for Nestle’s high-quality FMCG products.
The management has said that inflation pressures are likely to be more acute in 2022, with global commodity prices of coffee, milk, oils, and packaging up in high single digits.
#3 Hindustan Unilever (HUL)
HUL is the biggest FMCG company in India with diverse product portfolio of soaps and detergents, personal care products, food and beverages.
It reaches 9 out of 10 Indian households, with products spanning more than 50 brands. The company holds either the top or second position in most categories it operates.
It has one of India's most extensive distribution networks, comprising over 4,500 distributors and 8 million retail outlets. This strong brand equity and distribution muscle give HUL significant pricing power.
In periods of rising inflation, the company can gradually increase prices or tweak product grammage to offset higher input costs, helping protect margins while demand for everyday essentials remains steady.
HUL’s sales and net profit have grown at a CAGR of 10% over the past five years. Its ROE has averaged 19% during the same time, while ROCE has averaged 26%.
Besides strong financials, the company has a long history of rewarding its shareholders.
Currently, the company is navigating a challenging space from volatile commodity prices. If prices fall, it could support HUL’s margins. The consumption theme has also received a boost, and the trend is expected to continue.
Overall, the company is well placed to dominate the FMCG market in India despite the rising competition.
#4 Power Grid
Power Grid is a Maharatna PSU and the largest power transmission company in India.
By carrying electricity through its nationwide grid network, the company acts as a connecting factor between power-generating companies and power-trading companies.
Power Grid particularly has a business model. The company earns fixed returns on its transmission assets, which provides stable and predictable cash flows largely insulated from fluctuations in power demand or input costs.
To diversify revenue streams and support India’s growing infra, it ventured into EV charging infrastructure and is setting up charging stations across the country.
Power Grid’s sales and profits have remained sluggish over the past 5 years, growing at 4% and 7% per annum. Its ROE and ROCE have averaged 19% and 14% over the same time period.
The company has planned a significant capital expenditure. A substantial portion of this is driven by the need to strengthen the grid in data centre corridors like Mumbai, Chennai, Noida, and Hyderabad.
India’s renewed focus on the power and transmission sector has also opened up a multi-decade opportunity for the company. This is expected to be driven by rising power demand, the shift toward renewable energy, and the modernisation of power infrastructure.
Conclusion
Inflation has a way of quietly eroding the value of money. But while rising prices hurt consumers, some businesses are built to navigate and even benefit from such environments.
Companies with strong brands, dominant market positions, essential products, or regulated revenues tend to have the pricing power and stability needed to protect their margins when costs rise.
Of course, no stock is completely immune to economic cycles. But owning businesses with strong fundamentals and durable competitive advantages can go a long way in building a portfolio that stands firm even when inflation heats up.
That said, investors should evaluate every company's fundamentals, corporate governance, and valuations as key factors when conducting due diligence before making any investment decisions.
Happy investing.
Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.
This article is syndicated from Equitymaster.com