Rising US Shale production, low oil demand and high inventories have been a triple whammy for crude oil prices which are now trading below USD 45/barrel or some would say has entered the bear territory. Crude oil, also known as black gold made a high of USD 55.24 barrel and now made a low of USD 42.75 barrel, a fall of more than 22 percent in 2017.
“A decline of more than 20 percent from a most recent high is typically considered as a bear market. The last time crude hit a bear market was in August 2016. The ramp-up in US shale oil production raised concerns over the effectiveness of Opec’s supply cuts in balancing the oversupplied market,” D K Aggarwal, Chairman, and MD, SMC Investments and Advisors Ltd told Moneycontrol.
“The shale comeback is displayed by the unrelenting rise in the Baker Hughes rig count. The closely-watched metric has increased 22 weeks in a row -- the longest streak since 1987 when the data first started being collected,” he said.
It is expected that monthly U.S. oil production could hit a new record before the end of the year. As per International Energy Agency, U.S. will lead a surge in non-OPEC supply next year that will outpace growth in global demand.
But, India has nothing to complain about.
A fall in crude oil prices will help keep macros in check because it is still a major component of our net imports bill while on the other hand, it is good for equities because crude oil is used as a raw material by a lot of companies.
According to economists, a 10 percent reduction in crude oil prices could reduce Consumer Price Index-based inflation by around 20 basis points (bps) and bring about a 30 bps rise in gross domestic product (GDP) growth.
Most analysts expect crude oil prices to remain rangebound with upside capped at around USD 55 barrel and unlikely to fall below USD 40 to conclude that it is in a bear territory.
“We don’t expect crude oil prices to enter into a bear territory and expect rising demand to eventually drain out the global excess inventory,” Avishek Datta, of Prabhudas Lilladher, told Moneycontrol.
“Lower crude oil prices are beneficial to Indian companies as we import over 80 percent of our crude oil requirement. More specifically, lower crude oil prices help the Oil Marketing Companies (OMCs) as they don’t have to worry about the loss on subdidised products like LPG and kerosene,” he said.
We have collated a list of stocks recommended by different experts which are likely to benefit the most from fall in crude oil prices:
Analyst: Jayant Manglik - President - Retail Distribution, Religare Securities.
Synthetic fibres like polyester, viscose and acrylic are the key petroleum-based inputs (60 percent of total raw material cost consumed) for Sutlej Textiles, used in the manufacturing of synthetic yarn (55 percent of total revenues).
Thus, Sutlej is likely to be a key beneficiary of falling crude oil prices, which could result in a decline in the prices of these key inputs, though with some time lag. Led by demand revival and capacity expansion, we expect a meaningful turnaround in Sutlej’s Revenue and PAT growth over FY17-19E. Declining debt-equity and steady dividend payouts should provide comfort to the valuations.
Castrol India Ltd (CIL) is one of the leading automotive and industrial lubricant manufacturing and marketing companies in India. Lubricants are manufactured by blending base oils and additives, with base oil being the main component.
A sharp decline in the crude oil prices could result in lower base oil prices and help CIL improve its margins. “We estimate CIL’s Revenue and PAT to grow at a CAGR of 6 percent & 6.3 percent respectively over CY16-18E, led by new launches and sustained brand building efforts,” said Manglik.
Cash rich and debt-free status, superior return ratios and high and consistent dividend payouts justify the premium valuations.
Berger Paints India Ltd. is the second largest decorative paint player in India with a market share of 19 percent. The company has a strong distribution network comprising of 75 stock points and over 15,000 paint retailers.
Titanium Dioxide and crude derivative products form 50 percent of the raw material cost of Berger Paints. With crude oil prices have softened considerably over the past few weeks, we estimate this will aid EBITDA margin improvement by 50-100 bps, considering the company will pass on the only partial benefit of lower crude prices to end consumers.
“We are positive on the Paint sector and like Berger Paints, in particular, considering the company’s strong product folio and brand recall,” said Manglik.
Analyst: A.K.Prabhakar, Head -Research at IDBI Capital
INDIGO has a market share of 41.3 percent in the Indian passenger market and load factor stood at 91.1 percent and now lower crude prices can help in higher load factor and margin expansion.
Nilkamal (NILK) has a unique business model with pan-India presence and 1,500 distributors, 20,000 retailers, 60 warehouses and 42 branches. It dominates the material handling (market share of 45-50 percent) and moulded furniture markets (market share of 35-37 percent) with more than 2,000 products.
With falling crude oil price, the raw material cost for the company is expected to come down, which would provide impetus to its EBITDA margin. Overall, the company reported a volume growth of 8 percent during FY17 which we expect to increase to 10-11 percent during FY18/FY19 along with flattish realization growth.
With new product development and strong growth in domestic consumption, we expect its Revenue/EBITDA/PAT to grow at a CAGR of 10.4/11.2/13 percent during FY17-FY19E. We have a positive view on the stock.
Finolex Industries Ltd is the largest manufacturer of PVC pipes & fittings and second largest PVC resin manufacturer. They have a capacity of nearly 2.9LMT of PVC pipe & fitting. Profit contribution from PVC resin and pipe business is almost 55:45.
We expect as crude oil price is falling, the company’s raw material cost would come down which would aid to its margins. The company expects its PVC pipes & fitting business along with PVC resin business to see a double-digit growth over the next few years.
The company is investing Rs3 bn during FY17-19E to add 120KT of capacity. “We expect its Revenue/EBITDA/PAT to grow at a CAGR of 16 percent/17.4 percent/19.6 percent during FY17-FY19E. We keep BUY rating on the stock,” said Prabhakar.
Analyst: D K Aggarwal, Chairman, and MD, SMC Investments and Advisors Ltd
JK Tyre & Industries
The company has good fundamentals and management is focusing towards the reduction of its debts. It has a first-mover advantage in introducing cutting edge technology. Its plants are world benchmarks in water consumption with zero waste, 36 percent of its energy consumed is renewable.
It is a high-recall and trusted brand since last four decades. The company is enhancing its segment in the market by bringing equal products and the equal pricing and with the equal sales efforts with a lifetime warranty against any manufacturing defect to meet the Chinese competition.
Kansai Nerolac is the leader in the Industrial Coatings market space and it continues to increase its market share in this space. It has extended its close interaction with customers to the areas of Performance coatings which has helped it increase its market share.
The company now serves a vast array of OEM industries with a variety of products. The continued technology focus from the parent Kansai Paint Co. Ltd. (which holds 69.27 percent stake in the company), Japan has helped bring the latest technology products.
Based on the excellent track record and new technology offerings, Multiple New OEM Business have been awarded for future business prospects.
Analyst: Nitasha Shankar, Sr. Vice President and Head of Research, YES Securities (I) Ltd.
The core business will continue to see an improvement in profitability. The company’s management expects GRMs (Gross Refining Margins) to improve from current levels as there would be limited net refining capacity addition of 0.8Mbpd against an incremental demand growth of 1.3Mbpd in 2017.
While in Petchem, demand is expected to rise by 4 percent compared to a 3 percent increase in supply. This should help in supporting higher rates as well as higher product margins.
At the same time, the capex intensity that we have seen till now is expected to ease off from this year onwards. At the same time as the company starts to monetize investments made till now (like RJIO), cash flows are set to improve hereon.
Analyst: Rakesh Tarway, Head of Research, Reliance Securities
UltraTech Cement, Shree Cement, ACC, JK Cement, Mangalam Cement:
Most of the cement companies have enhanced their fuel mix in favour of petcoke and currently using over 80 percent of petcoke as fuel. Petcoke prices move in tandem with crude prices. Hence, a fall in crude price is beneficial for all cement companies.
Notably, a drop of 5 percent in petcoke prices may result in incremental EBITDA/tonne of Rs40-50. UltraTech, Shree Cement, ACC, J.K. Cement, Mangalam Cement, etc. would be key benefitted most.
CEAT & MRF
As rubber accounts for 70 percent of total opex for the tyre industry, a meaningful fall in crude price will aid tyre companies in margin expansion.
There is a healthy correlation between crude price and rubber prices as they move parallel with each other. CEAT and MRF would be major gainer from fall in crude prices.
For paint companies, the fall in crude oil prices will be beneficial as crude oil derivatives is used as inputs for paints.
Given that the entire benefit is unlikely to be passed on to the end consumer, there will be an expansion in margins. Asian Paints and Berger Paints should be major beneficiaries.
Disclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decision.