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The decision by the Organization of the Petroleum Exporting Countries (Opec) to keep output unchanged and its fallout - the sharp fall in crude oil prices - mean a lot for key sectors such as oil & gas, paints, and aviation sectors.
The stocks of oil marketing companies have gone up, and there is more upside, given the lower working capital requirement and interest cost savings. According to Manish Sonthalia, senior vice-president and head equities, portfolio management services (PMS) at Motilal Oswal Asset Management, lower working capital will result in better net profit margins, which are yet to be captured in prices. There is, however, scope for appreciation from these levels. According to Phani Sekhar, fund manager, PMS, Angel Broking, the impact is marginally positive as some of the gains on account of lower crude oil prices will be offset by falling gross refining margins. Aneesh Srivastava, chief investment officer at IDBI Federal Life Insurance, said, "Incrementally, there would not be much gain. If there is no subsidy next year, these companies will have to perform on their own fundamentals hence correction in crude oil will not have a positive or negative impact on the companies. They will be impacted by the marketing margins that they earn."
Most analysts, however, are not very bullish on upstream companies. For Cairn India, the fall in crude oil realisations, which have come off sharply from $100 to $72 now is a negative. The same is the case with ONGC though a reduction in subsidy burden is beneficial. However, beyond a point, declining prices will hurt net realisations (post subsidies) as ONGC's subsidiary, ONGC Videsh's fortunes are directly related to the price of crude oil - it operates in international markets and does not have to bear the subsidy burden. Given falling revenue collections, analysts say the government might load ONGC with the subsidies, which is a negative. However, a lot hinges on the divestment programme which will remain an overhang. Clarity on a long-term subsidy-sharing mechanism is something the market is keenly awaiting.
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For paint companies, the fall in crude oil prices will be beneficial as they use crude oil derivatives as inputs. Given that the entire benefit is not going to be passed on to the end consumer, there will be an expansion in margins. This was reflected in the stock prices of Asian Paints and Berger Paints on Friday. Raw material gains do not get passed on fully, leading to higher margins and profits on the same turnover, says Sonthalia. Analysts believe price targets are expected to move up even on current price-earnings (P/E) multiple. However, gains are unlikely to come in the December quarter given that they carry inventory for one-and-a-half months. The same is the case with Castrol, which will benefit as a significant portion of its inputs are imported. According to Sonthalia, the outlook needs to be factored in as crude oil prices are likely to stay at these levels for some time and it is not a one-off event.
Although aviation stocks such as SpiceJet and Jet Airways moved up sharply (up 18-20 per cent on Friday) on expectations of lower aviation turbine fuel, analysts are not too bullish on this space. Gains from lower fuel costs are offset by steep price cuts in an effort to increase load factors. The run-up in prices is more sentimental than realistic, as financials of airline companies are more sensitive or impacted by competitive action than fuel price movement. Tyre companies have had a dream run going up many times over in the past couple of years on falling natural rubber prices and they could extend gains as crude oil derivatives form part of their raw material mix. However, analysts believe at these levels (10-15 P/E), they are prohibitively expensive given the commoditised nature of the business.
The key gainers, however, both due to lower operating costs and any interest rate cuts will be the auto sector. With operating costs coming down and a steep hike in rail haulage charges, medium and heavy commercial vehicle makers stand to benefit. Most sectors will benefit from lower costs as rule of thumb indicates that a 10 per cent fall in oil prices improves GDP by 0.5 per cent. However, given the expectations of a rate cut, interest-rate sensitive sectors, including automobile and banks, should benefit the most.
Pure rate sensitives are real estate, automobile and banks. Given that the real estate sector has its own set of problems, automobiles and banks are favourite.
Considering the disappointing performance in the September quarter, analysts are in a wait-and-watch mode and have so far not upgraded the earnings for the December quarter.
