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Commodity prices rallied sharply between February and May, which was beneficial to metal and select oil stocks, but falling prices is generally good for companies that use these commodities as their raw material.
Antique Stock Broking said one pressing anomaly since the beginning of the year was the divergence from the inverse relationship between the dollar and commodities.
From its February lows until May end, the DXY (dollar index) rose 6.2 percent while the S&P GSCI Commodity index appreciated 9.5 percent. Crude prices were a big contributor (up around 20 percent) to the S&P GSCI Commodity index, the report said.
Brent crude futures, the international benchmark for oil prices, jumped to $80.50 a barrel in June from around $64 a barrel in February. Since then, crude oil prices reversed some of those gains to trade around $72 a barrel, which was largely due to trade war tensions between the US and China.
However, since the rhetoric around trade wars escalated in May-end, when US President Donald Trump walked out of a possible deal with China, saying the US will "probably have to use a different structure”, commodities across the board have corrected sharply.
Through June till date, the DXY is up around 0.5 percent while industrial metals are down 10.9 percent, agri index 13.8 percent and crude, which was the proverbial 'last man standing', 9.5 percent. Within industrial metals, copper is down 10 percent, zinc 17 percent, aluminium 7 percent and lead 13 percent.
The Trump administration has imposed or is looking to impose tariffs on $500 billion worth of imports, drawing sharp counter-reactions from China and traditional trade partners such as the EU and Canada, who have in turn threatened to impose tariffs on at least $50-75 billion worth of US exports, Antique said.
Further, the Trump administration is looking to raise tariffs to 25 percent on auto imports, a move that is likely to hurt the EU, China and Korea, it added.
On a macro-perspective, the research house said the trade war will have multi-fold implications on global growth and inflation. "A 'tit-for-tat' response will certainly weigh on global growth. So far, lead indicators like the Baltic Dry index and trade volumes are holding up, but companies operating across geographies with transactions between affiliates will have to deal with immense challenges as reconstitution of supply chains can upend existing arrangements resulting in a disruption."
Meanwhile, there is another possibility that a combination of a strong DXY and higher duties in the US will lead to dumping and depressed pricing elsewhere, it said.
For India, Antique said a rise in commodity/crude prices if associated with favourable assessment of global growth is actually positive for Indian markets. "In the near term, falling commodity prices, especially crude, will provide some relief (at least temporarily) to the bond/rupee markets while lifting sentiments in equity markets."
If the trend (of softer commodity prices) sustains, ceteris paribus (growth estimates unchanged), Antique's preferred plays would be Asian Paints, UltraTech Cement, HPCL, Exide Industries, State Bank of India, Voltas, Apollo Tyres, Finolex Industries, NCC, Transport Corporation and Mold-Tek Techologies.
Here is the list of 11 stocks that would be biggest beneficiaries of falling commodity prices:
PSU banks will be big beneficiaries from a fall in yields. Our top pick among PSUs is SBI as it has the best CET (Common Equity Tier) ratio among PSBs (9.7 percent) and strong liability franchise.
Paint companies are among the biggest beneficiaries of fall in crude oil prices. Crude derivatives form about 65 percent of Asian Paints raw material cost.
Crude derivatives are primarily used in solvent based paints. Crude derivatives used in paints follow the trend in crude oil prices with a lag of about 3-6 months.
Therefore, a 10 percent fall in crude oil prices is expected to benefit Asian Paints gross margins by about 360-370bps with a lag of about 3-6 months.
Nearly 50 percent of the cost of Cement manufacturers is directly/ indirectly linked to energy resource. This includes cost related to power & fuel, freight, packaging, etc.
Ceteris paribus, a 1 percent decline in crude will result in an estimated around 20-30bps decline in cost for Cement sector. Preferred pick in sector is UltraTech Cement.
A drop in crude oil benefits HPCL on two counts viz: a) company gets a better headroom to adjust retail price of petrol and diesel, thereby raising the possibility of healthier marketing margin and 2) it reduces its working capital requirement, a $5 per barrel drop in crude price can potentially lower the working capital requirement by around 9-10 percent, thereby reducing the requirement of working capital funding and therefore related interest cost.
Lead and alloys constitute 70 percent of raw material costs which could reduce post the recent decline in lead prices. We expect the EBITA margins to improve by 60-70bps from our FY19e estimate of 14.8 percent if these prices sustain.
Midcaps
The stock is down 17 percent YTD. It is a strong play on the AC business as it continues to be a market leader, the project business has turned the corner and JV with Turkey based Arcelik, a strong European white goods brand to aid improve product basket.
Recent correction in prices of crude by 5 percent if sustainable should lead to a moderation in raw material costs.
As per our estimates around 35 percent of raw material costs are directly linked to crude derivatives in the form of synthetic rubber and carbon black, we could see EBITDA margins improving by 30-40bps from our current FY19e estimate of 12.4 percent.
Almost 100 percent of the raw material costs are linked to crude and are a direct pass through with a lag of a few months.
Thus any tempering of crude prices will lead to more favourable pricing.
The stock is down 36 percent YTD, and is a high beta play. The company has Rs 32,000 crore in order backlog. Of this, 50 percent are short-cycle to be executed over 2 years.
In FY19, NJCC has guided for Rs 14,000 crore in order inflows. This is as against Rs 25,000 crore inflow in FY18.
With revenues lower than inflows, accretion to order backlog gives multi-year visibility.
Transport Corporation of India
TCI has an industry leading presence in truck freight business (asset light), supply chain logistics/3PL logistics (moderate on assets) and seaways (asset heavy).
TCI is aptly poised to benefit from revival in domestic macro, benefits from GST/Eway rollout and expected improvement in trends towards outsourcing of logistics.
MTEP is an innovator and pioneer in rigid plastic packaging in India. It is the only company in India thus far to have fully integrated facilities with food and FMCG packaging to drive growth and margin expansion, raw material is linked to crude but is a pass-through.
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