The steep fall in oil price is definitely positive not only for India which imports around 85 percent of requirement, but also companies which use as their raw material in any form.
Oil prices have been hit hard due to low demand after novel coronavirus or COVID-19 forced the world to either go on lockdown or partial shutdown. Oil prices are at their lowest level since 2003.
The price war raised by Saudi Arabia, the world's largest oil producer, after OPEC and its allies failed to agree on production cuts last month also put a lot of pressure.
International benchmark Brent crude futures dropped to $24.68 a barrel intraday on March 23, the lowest since April 2003, down 65 percent from its 2020 peak seen in January. Today at the time of writing this copy, oil price gained 3.44 percent to trade at $27.96 a barrel amid hopes that the United States will sign a $2 trillion stimulus deal to support the economy from COVID-19.
The steep fall in oil price is definitely positive not only for India, which imports around 85 percent of the requirement but also for companies which use as their raw material in any form.
We spoke to analysts to find out what are those sectors or stocks to get benefitted from falling oil price.
Most analysts feel oil marketing, paint and tyre companies gained the most as crude oil is their direct raw material for their products."Amid volatile crude prices, oil marketing companies (OMC), paints and tyre sector will be benefited most. We would recommend buying paint
and selective tyre companies in this turmoil. We would recommend investors to refrain buying OMCs from current levels as demand may decline due to coronavirus outbreak globally," Gaurav Garg, Head of Research at CapitalVia Global Research Limited- Investment Advisor told Moneycontrol.
AK Prabhakar of IDBI Capital also said normally oil marketing companies were going to benefit, while paint and tyre sectors will also be benefited as crude is the raw material for them.
It will also benefit the auto sector in general as low price induces to buy vehicles, but as the virus forced to do lockdown, everything comes to a standstill and no demand to auto also.
Further, stocks from FMCG and consumption will also benefit the most from sharp falling oil prices as raw material and packaging cost will be lower, Anand James, Market Strategist at Geojit Financial Services said.
He feels this fall is going to be a growth multiplier and in fact will be applicable to all sectors when the market will begin recovery.
According to Vineeta Sharma, Head of Research at Narnolia Financial Advisors, in the falling crude prices scenario, HPCL and Asian Paints are two stocks that may be accumulated now.
"The falling crude prices will reduce the burden on oil marketing companies on subsidy front. Also, HPCL's earnings visibility looks attractive on the back of its capex plans," she said.
"HPCL's expansion projects at Mumbai (from 7.5mtpa to 9.5mtpa + residual upgrade project, Rs 4,200 crore capex) and Visakh (from 8.3mtpa to 15mtpa, Rs210bn) refineries are on track for completion by FY21E. The company is available at a dividend yield of 3.5 percent. We recommend buy on HPCL with the target price of Rs 240," she added.
In case of Asian Paints, she said the company which began commercial operations of new plants at Vizag and Mysuru had attained 75 percent capacity utilization by Q3FY20.
"Volumes of the company may remain impacted due to poor global- domestic macros. However, falling crude will boost gross margins of the company and cost rationalization measures will further support profitability. ROE is expected to improve led by margin expansion and improving asset turnover. We recommend buy with target of Rs 2,060 per share," she added.
Asian Paints corrected 21 percent, Balkrishna Industries 45 percent and HPCL 32 percent from their highest closing of 2020.
In fact, the benchmark indices itself lost more than 37 percent from their record highs seen in January, which clearly indicated that valuations supressed to large extent.
AK Prabhakar feels Reliance Industries, the operator of world's biggest refinery complex, is also the major beneficiary of falling oil price as it buys crude in bulk for its refinery. The stock already corrected 44 percent from its 2020 high on concerns of COVID-19, impacting oil demand.
"Once the COVID-19 subsides, the demand along with benefits of IMO fuel regulations impact will improve benchmark gross refining margins (GRM)," said Yes Securities.
RIL’s retail business has witnessed a very strong momentum in the past few years led by significant expansion in stores and an even stronger like for like growth across segments, it added.
"During FY19-22, we expect RIL to witness an earnings CAGR of 20 percent. Return on equity is likely to improve by 200bps and debt/equity is expected to reduce from 0.7x to 0.4x during the same period. Considering this, we find FY22E EV/EBIDTA of 6.3x attractive," the brokerage said, adding expected increase in ARPU and constant addition to its subscriber base will aid Jio business.
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