Best Stocks To Buy To Benefit From Crash In Crude Oil Prices

Stocks to shine on crude’s decline

Oil prices are crucial for the Indian markets, given the high import dependence (~80% of oil requirements) of the country. Brent crude hit the year’s peak of $86/bbl in early October, sparking major fears of an economic slowdown in the country.

However, prices have eased since then to $60-levels due to oversupply concerns and the Iran sanctions waiver. The recent slump has allowed India Inc. to breathe a sigh of relief.

In this report, we look into the impact of falling crude oil prices on select sectors that may benefit from the development.

 Paints to get back their lustre from recent dip in crude prices coupled with price hikes taken over the last two months. Asian Paints (APNT), with ~54% market share, is poised to benefit from the decorative segment’s growth and planned capacity expansion.

 Tyre-makers are likely to benefit as their key inputs (~80%) are crude derivatives. Apollo Tyres (APL) seems well placed given the higher earnings growth, rise in earnings in Europe operations, & lower exposure to the competitive 2W tyre segment.

 Decline in crude prices over the last two months comes as a relief for OMCs & improvement in margins from current levels seems likely, albeit with a time lag. HPCL has greater exposure, compared to peers, to the marketing segment and may be a key beneficiary from the dip.

 Lubricant manufacturers, particularly, Gulf Oil Lubricants (GOL), are likely to see margin improvement, supported by increase in volumes, albeit with a time lag. GOL may witness greater traction in volume owing to additional capacity, leading to increased market share.

 Aviation may take a breather after reeling under various cost pressures, as ATF eases from the year’s high of `76,379/KL on Nov 01, 2018 to 68,051/KL on Dec 01, 2018.

Largest aviation player Interglobe Aviation is likely to reap benefits as a $5 change in crude is estimated to make its profits swing by ~35%.

 Plastic products: Over the last decade, yoy change in Brent crude prices has a strong correlation of 0.9 with the yoy change in average polymer prices, suggesting that plastic product manufacturers are expected to witness a decent growth in their gross margins.

Declining Brent crude augurs well for India’s macros

After what appeared to be a relentless upmove, Brent crude prices have been on the decline from the October 06, 2018 peak of $86/bbl, shedding ~30% on concerns over a potential oversupply overhang as well as weak equities, geopolitical issues, and the subsequent softening demand.

Several concerns weigh on crude prices currently. The prime worry is the potential supply glut by OPEC+ and the US administration’s waiver to Iran for supplying oil to eight countries for six months starting November 05, 2018.

The second key concern is the possible slowdown in global growth owing to trade wars, which may consequently lower demand. Although fears of further escalation in trade wars may be temporarily allayed given the progress in US-China talks at the recently held G20 meet, nevertheless, there is still lack of clarity on the agreed-upon terms between the two countries.

On the domestic front, crude prices are always a key factor impacting the economy and markets given that India remains one of the biggest net importers of crude oil. The economy is hard hit by any escalation in the prices of the commodity, directly and indirectly hitting almost every sector in the economy and also causing the deficit scenario to go awry.

Considering the case in 2013/14 when crude hovered around $110 levels, we saw the Indian GDP being knocked sharply.

However, back in late 2014-early 2015 when crude eased to below $60 levels, the country’s growth bounced back to healthy levels. A recent study showed that a $10/bbl change in crude oil prices results in 55bps impact on CAD/GDP and 30bps impact on inflation.

Paints & Adhesives to be major beneficiaries

Key inputs for paint manufacturers are monomers and titanium dioxide, which are crude oil derivatives and make for 30-35% of the total raw material cost for the sector. Vinyl acetate monomer, also a crude oil derivate, is a key raw material for adhesives, comprising 60% of the raw material cost for adhesive-maker Pidilite.