Oil hits $95: Buy paint, tyre stocks on dips, avoid aviation, say analysts

Rising crude oil prices is becoming a sore point for sectors such as tyres, paints, and airlines, which are heavily dependent on crude oil and derivatives as their raw material.

Analysts say, the near-term outlook for related companies has worsened as their operating margins may come under pressure in the coming quarters given that crude and its derivatives account for 30 to 50 per cent of operating costs.

"Soaring crude oil prices are inwardly negative for oil market companies (OMCs), paints, tyre and aviation-related stocks as these companies are either raw materials or form major product mix for the production of final products or services," says Ravi Singhal, Vice-Chairman at GCL Securities.

Oil prices climbed towards their highest levels in more than seven years on Monday on fears that a possible invasion of Ukraine by Russia could trigger sanctions (on the latter) from US and Europe and disrupt energy exports.

Brent crude futures and US West Texas Intermediate (WTI) hit intra-day highs of $95.91 and $94.92, respectively, and analysts see further upside from current levels.

"In a severe scenario, we assume that 10–20 per cent of Russian oil production and exports are disrupted, lifting Brent prices to $125 or higher," said a recent note by global brokerage UBS.

Russia is the world’s third-largest producer of oil and the second largest producer of natural gas, with a global market share of 12 per cent and nearly 17 per cent in 2020, respectively, according to the BP Statistical Review of World Energy.

Any disruption of oil exports from Russia may flare up commodity prices further, stirring inflation across the globe and denting markets.

Oil is 51 per cent higher than a year ago, and 25 per cent higher year-to-date (YTD). On the contrary, shares of related companies have dropped up to 16 per cent YTD as against 0.12 per cent gain in the benchmark Nifty50 index.

Individually, shares of Kansai Nerolac, JK Tyre, Ceat, Indigo Paints, SpiceJet, Berger Paints, and MRF have declined between 7 per cent and 15.8 per cent YTD, data by ACE Equity shows. On the upside, oil exploration firms such as Jindal Drilling and Industries, and Hindustan Oil Exploration have rallied 13.5 per cent and 59 per cent, respectively. CHECK YTD PERFORMANCE HERE

That said, analysts unequivocally suggest buying quality names from these sectors, barring aviation, from a long-term perspective as the tensions are expected to ebb over the medium-term.

"The rising crude prices remain one of the key concerns for these sectors as their margins get impacted and we feel they would be under pressure in the near-future. However, crude prices would stabilize in the long run, so investors can utilise this phase to gradually accumulate quality stocks, mainly large-caps, in sectors such as paints, tyre and OMCs but avoid aviation for now," says Ajit Mishra, VP-Research at Religare Broking.

Ravi Singh-Vice President and Head of Research at ShareIndia, further adds that InterGlobe Aviation (IndiGo), Jet Airways, and Spicejet may witness another 10 per cent correction from current levels due to rising fuel costs and tepid air travel.

Berger Paints, Asian Paints, GAIL India, Hindustan Petroleum Corporation, Indian Oil Corporation, Apollo Tyres, and MRF look attractive at lower levels, he says.

Kshitij Purohit, Lead Commodities and Currency analyst at CapitalVia Global Research, meanwhile, is bullish on ONGC.