Already riding on significant gains, state-run oil companies are staring at another leg of the rally. Paint stocks, on the other hand, have the opportunity to capitalise on the current fall to shed their long underperformance.
Considering the above triggers, here’s what investors can do:
Oil prices have dropped to 14-month lows and benchmark Brent Crude is hovering around $72 per bbl mark while US WTI was below the $70 mark as economic concerns in the US and China weigh on the consumption prospects.
According to a Yes Securities report, the prices may remain in the range of $70-77 over FY25/26 while India’s oil demand remains intact.
“Demand for diesel and petrol remains strong despite the retail selling prices of both these products being high, while the fall in the crude price has been supportive to OMCs towards improved margins,” Harshraj Aggarwal, Lead Analyst at Yes Securities said. Diesel and petrol gross marketing margins on August 20, 2024, were at Rs 7.4 and Rs 10.6/litre respectively, a to-date Q2FY25 average of Rs 4.2 and Rs 7.6/litre versus the prior quarter’s average of Rs 3.7 and Rs 5.4, respectively, he said in a note.India’s oil demand was strong in July 2024 on an increased mobility and witnessed a 7.2% YoY increase in total petroleum product consumption in India. The 4MFY25 petroleum product consumption was at 40.6mmt, up 3% YoY — diesel at 31.5 mmt, up 2.1% YoY, petrol at 6.7mmt up 7.8% YoY, ATF at 1.5 mmt up 11.9% YoY, while LPG at 4.75mmt is up 5.6% YoY.
Aggarwal prefers oil stocks over gas and has recommended a buy on Hindustan Petroleum Corporation (HPCL), Oil India, Bharat Petroleum Corporation, ONGC and Chennai Petroleum Corporation. The targets are placed at Rs 500, Rs 855, Rs 440, Rs 391 and Rs 1,450, respectively. He also has a buy view on Reliance Industries (RIL) for a target of Rs 3,540.
A look at the performance of these stocks over a 1-year period reveals an impressive rally in most of them. State-run HPCL’s returns stand at 245% followed by Oil India, Chennai Petroleum and ONGC which have given returns of 240%, 76% and 63%, respectively.
Bharat Petroleum Corporation (BPCL) and Indian Oil Corporation (IOC) have delivered returns of 99% and 84%, respectively, in the same period.
A sharp sell-off in crude oil prices has definitely added a fizz to the OMC, paint and tyre stocks as their cost burden declines, adding to their bottom-lines, said Aamar Deo Singh, senior vice-president (Equity, Commodity & Currency) at Angel One. Singh said only a sustained decline in crude oil prices could result in some significant value addition to these companies.
The excitement could be short-lived as the Angel One analyst expects OPEC to announce cutbacks in crude oil production in coming weeks to shore up the prices given that its comfort zone lies in the range of $75-$85.
OMCs will be able to hold on to their marketing spread even if global demand-supply fluctuations affect oil and refinery profitability, Master Capital Services tells ETMarkets. The retail prices indexed to oil at $85/bbl and normal GRMs have remained unchanged for the last 28 months, suggesting that profits are correlated with changes in oil and refining margins, Master Capital said.
Not just the OMC’s, paint and tyre stocks, which use crude oil as an input, are expected to benefit from benign prices.
Over the past one year, paint stocks have lagged market trends missing from the action. While Asian Paints and Berger Paints have remained flat, Kansai Nerolac has seen a share price erosion of 9%. On the other hand, tyre stocks like Balkrishna Industries, Ceat, Apollo Tyres and JK Tyre & Industries have given returns between 22% and 62%.
Crude oil is a crucial manufacturing input for paint firms and thus a decline will reduce costs and help sustain profits in the future, Master Capital added. The financial services company sees support for Brent at $70 bbl.
Ajit Mishra, Senior Vice President, Research at Religare Broking anticipates OMCs, said paint and oil-related stocks will benefit significantly if the recent decline in crude oil prices persists. He has buy ratings for Berger Paints and Kansai Nerolac, with target prices of 655 and 372, respectively and an accumulated rating for Asian Paints with a target price of 3,322. Paint companies, which rely on crude derivatives like resins and solvents, would experience a decrease in raw material costs, enhancing their margins, Mishra said.
On the outlook, the Religare analyst sees WTI crude prices having strong support around $58-61 per barrel and expects a recovery to $73-75 as oil inventories with projected inventory decrease by 0.8 million barrels per day in the second half of 2024.
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While fall in prices is a positive trigger for Indian equities, its impact would depend upon the reason and duration of the fall, US brokerage firm Morgan Stanley said as it expressed concerns over US and China slowdown.
The decline in oil prices would be a cause of concern for Indian equities if the oil market is right about its assessment of a global slowdown. “We think it is safe to say that the recent bearishness in the oil markets is being led by growing concerns about slowing demand, and to that extent, its positive impact on India’s terms of trade is diluted greatly,” said Morgan Stanley’s strategists, including Ridham Desai, in a client note.
Also Read: Fall in oil prices on downturn fears a concern for India: Morgan Stanley
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)