OMCs can be a lucrative opportunity as they offer a good dividend yield
In the last year, crude oil prices have traded with higher volatility. Multiple events affect the prices, whether it was higher oil supplies from the US or the mysterious drone attack in Saudi Arabia that surged crude prices above $70 per barrel.
Brent crude has been trading in the range of $53-75 per barrel. Presently, China's growth concerns as Coronavirus impact deepens will be impacting global crude prices as it is the second-biggest crude oil consumer in the world after the US.
Prices of black gold have impacted Indian equity markets as it, directly and indirectly, affects sectors. CPI inflation increased to 7.4 percent in December 2019 (highest since July 2014) due to a sharp rise in food inflation. This is the main worry as of now for RBI and this may stop the MPC from cutting rates further.
Higher crude prices benefit oil exploration companies, all other sectors that use crude derivatives as inputs will suffer, which include tyres, paints, lubricants, chemicals and airlines due to higher input cost, higher working capital.
Oil marketing companies (OMCs) generally get hurt on higher crude oil prices as it affects their corporate earnings. The same is although positive for export-oriented sectors such as IT and pharma, as a rise in crude will put pressure on the currency as well, and it will appreciate the US dollar.
Since an increase in oil price will also impact energy products like coal, natural gas, this will be negative for almost all manufacturing companies including cement companies, which consumes a large amount of energy.
In the current situation, amidst global growth concerns over coronavirus along with a slowing economy, higher inflation ahead may keep crude prices lower.
Keeping this view, OMCs can be a lucrative opportunity as they offer a good dividend yield. Although, paint stocks are currently trading at rich valuations and hence investors should try to grab the opportunity at any correction.
The author is Head of Research at CapitalVia Global Research Limited- Investment Advisor.Disclaimer: The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.