12/9/2014

Eightstocksthatwillgainfromslidingoil|BusinessLine

THEBIGSTORY

Eightstocksthatwillgainfromslidingoil

Best10StockstoBuyNow100150%targetreturnin11.5yrsJustsignupforFreeTrial.
stockaxis.com
Wonderinghowtomakethemostoffallingcrudeprices?Goforstocksthatbenefiteitherdirectlyorindirectlyfromthe
decline

Crudeoilpriceshavedroppedmorethan35percentsinceJune,drivenbymultiplefactors,includingmoderationin
demand,increaseinsupply,strengtheningofthedollarandunwindingofspeculativelongpositions.Thisspellsgood
newsfortheIndianeconomyaswellascompanies.
SincetheGovernmenthasseizedthechanceandderegulateddieselprices,thesubsidyburdenwillease,helpingto
lowerthefiscaldeficit.ThedropwillalsoreduceIndiasimportbill,thusprovidingrelieftothecurrentaccountdeficit.
Sinceoilpriceshaveacascadingeffectonothergoods,thisisexpectedtohelpbringdowninflationtoo.Andfalling
inflationwillgivetheRBIroomtocutinterestrateswhich,inturn,willgivealeguptoconsumption.
Macrosaside,fallingcrudepriceswillhelpcorporateearningstoo.Thedirectimpactofthisfallwillbeonupstreamoil
companiessuchasONGCandOilIndiathatwillnowseetheirshareofthesubsidyburdengoingdown.Companies
thatusecrudeorcrudederivativesasinputs,suchasmanufacturersofplasticproducts,synthetictextiles,tyresand
paints,willseemarginsexpandingduetolowerinputcosts.
Hereareeightstocksthatstandtogainfromfallingcrudeprices.Thepricesofsomeofthesestocksmightalreadyhave
factoredintheadvantagefromslidingcrude.Youcankeepthesestocksonyourradarandpickthemupwhenyouget
theopportunity.
Boosttobottomline
ONGC,thepublicsectorhydrocarbonexplorationmajor,isamongthebigbeneficiaries.Paradoxically,foracompany
thatderivesmostofitsrevenuefromcrudeoil,apricedipwillhelp.ThatsbecauseONGCsnetrealisationthefinal
amountitgetsforitsproductsafterprovidingdiscountsshouldrisefromthelowsofthepastfewyears.Thesubsidy
burdenthatONGCbears(throughdiscountstotheoilmarketingcompanies)isexpectedtoreducesharply.Thisis
thankstoanexpectedsharpdipinthetotalfuelunderrecoveriesofoilmarketingcompanies(OMCs)IndianOil,
HPCLandBPCLfromsellingfuelsbelowcost.
TheupstreamcompaniesONGCandOilIndia,alongwithGAIL,havebeenshouldering4050percentofthetotal
underrecoveryburdenoftheOMCstheGovernmentbearsachunkoftheremainingburden.Amongtheupstream
companies,ONGCprovidesthelionsshare(nearly85percent)ofthediscountstotheOMCs.
Theweaknessincrudeoilprice,alongwiththemonthly50paisehikeindieselpricessinceJanuary2013,neutralised
underrecoveriesonthefuelinSeptember,andpavedthewayforpricedecontrol.So,underrecoveriesondieselthe
largestsofarshouldbeathingofthepast.
DomesticLPGsubsidiesshouldalsoreduce,withtheGovernmentrevivingdirectbenefittransfers.Ergo,fromnearly
1,40,000crorein201314,thetotalunderrecoveryburdenshouldfalltoabout85,000crorein201415andtoabout
60,000crorein201516.
AdipinunderrecoveriesshouldimproveONGCsnetrealisations,whichoverthelastfewyearshavebeendenteddue
http://www.thehindubusinessline.com/features/investmentworld/eightstocksthatwillgainfromslidingoil/article6535372.ece?css=print

1/3

12/9/2014

Eightstocksthatwillgainfromslidingoil|BusinessLine

toincreasingdiscountstoOMCs.Fromaround$56abarrelin200910,ONGCsnetrealisationfelltoalowof$41a
barrelin201314.Evenwithlowercrudeoilpricescurrently,alowersubsidyburdenshouldimproveONGCsnet
realisationtoabout$5560abarrel.CrisilResearchhadestimatedthatlowerunderrecoverieswilladdabout10,500
12,000croretotheprofitofupstreamcompaniesin201415andanother7,0007,500crorein201516.
AchunkofthiswillflowtoONGC.Evenifcrudeoilpricesmovehigher,withdieselunderrecoveriesdoneawaywith,
ONGCsnetrealisationsshouldonlyimprove.Besides,therecentincreaseinthepriceofdomesticgas,thoughlower
thanexpectations,shouldaddabout4,700croretoONGCsannualprofit.
Smootherfuture
ONGCssmallerpeer,OilIndia,whichbearsabout10percentoftheupstreamburdenfromunderrecoveries,should
alsobeakeybeneficiaryofthedipincrudeoilprice.Itsnetrealisation,duetomuchlowersubsidydrag,should
improvesharplyfromthelowof$47abarrelin201314andbolsterthebottomline.IthelpsthatOilIndiastrack
recordofincreasinghydrocarbonproductionisbetterthanthatofONGC.Therecentgaspricehikeshouldalsoadd
about600croretothecompanysannualprofit.
Acolourfuloutlook
Crudederivativesconstituteaboutathirdoftherawmaterialcostsforpaintcompanies.Hence,asharpfallincrude
priceswillleadtobettergrossmarginsforthesecompanies.Rawmaterialsforpaintcompaniesincludetitanium
dioxide,additives,pigments,resinsandsolventsmostofthesearecrudederivatives.Onanaverage,a10percent
dropincrudepriceswillimprovegrossmarginsby200300basispoints.
However,theactualbenefitcanvaryacrosscompanies,dependingontheirproductmix.
AsianPaintshasastrongbrandnameandleadershippositioninthedecorativepaintssegment.Withearlysignsofa
pickupintheeconomy,realestateisalsoseeingsignsofrevival.Strongdemandfordecorativepaints,drivenbyhigher
repaintingdemandandfestiveseason,augurswellforAsianPaints.Thecompanyisthemarketleaderinthesegment,
whichcontributesabout80percenttoitstotalrevenues.
Thecompanysfocusoninternationaloperations(13percentofrevenues),willalsoboostrevenues.
AsianPaintshasagoodtrackrecordofperformance.Overthelastfouryearsithasoutperformeditspeersintermsof
revenuegrowth.Itsrevenueshavegrownby17percentannuallyduringthisperiod.Itenjoysamuchhigheroperating
margin(16.6percent)thanitspeerssuchasKansaiNerolacandBerger(around1112percent).
AsianPaintshasthuscommandedahigherreturnratio.Thereturnonequitywas32.8percentin201314.
Thestockcurrentlytradesat31times,FY16earnings,whichisatamarginalpremiumtoitspeers.However,strong
volumegrowthinthedecorativepaintssegment,improvementinmarginsandahealthy24percentgrowthinearnings
annuallyoverthenexttwoyearsjustifythispremiumandthestockcanreratefurther.
Revvingup
KansaiNerolacisaleadingplayerintheindustrialpaintssegment,cateringmainlytotheautomotivesegment.Among
otherpaintplayers,Kansaihasalargerexposuretotheindustrialpaintssegment,commandingmorethanathirdof
marketshare.Theslowdownintheautosegmentimpactedthevolumesforthecompany.Thiswillchangewiththe
revivalinautovolumes.Givenitsleadershippositionintheindustrialspace,Kansaiisagoodplayontherecoveryin
theautoandcapexcycle.
KansaialsohasstrongbrandsinthedecorativepaintssegmentsuchasImpressions.Thecompanyhasincreasedits
revenuesfromthissegmentoverthepastyearsandnowderivesabouthalfofitsrevenuesfromthisspace.Repainting
demandwillcontinuetodrivegrowthforthissegment.
Thecompanyssaleshavegrown17percentannuallyoverthelastfouryears.Improvementinautosalesandstrong
demandfordecorativepaintsshouldsee1819percentrevenuegrowthoverthenexttwoyears.Thereisalsoscopeto
improveitsmarginsonthebackofapickupinindustrialvolumes,sanguinerawmaterialpricesandoperational
efficiencies.Earningsareexpectedtogrowby2830percentannuallyoverthenexttwoyears.
Atthecurrentpricethestockistradingat27timesFY16earnings.Strongearningsgrowthledbyrevivalinautosales
andbetteroperatingmarginsofferamplescopeforrerating.
Onthefasttrack
Althoughnaturalrubberconstitutes4050percentoftherawmaterialforthetyreindustry,crudeoilderivativessuch
ascarbonblack,syntheticrubberandnylontyrecordfabricalsogointothemakingoftyres.Adropincrudepriceswill
beanadditionalsweetenerfortyrecompanieswhichhavealreadyseenoperatingmarginsexpandtodoubledigitsin
thelastfewquartersduetoasteadyfallinnaturalrubberprices.
JKTyreandIndustries,whoseoperatingmarginstouchedabout11percentinFY14,iswellplacedtogainfromthese
factors.Besidescheaperrawmaterials,recoveringcommercialvehiclesalesandthetrendofrapidlyincreasing
radialisationinCVtyres(about25percentcurrently)favourthecompany.JKTyreisthemarketleaderinradialtyres
fortrucksandbuseswithabout35percentshare.Radialtyresaddvaluetotheproductmixasthesearepricedhigher
andbringbettermargins.
Overthenextonetwoyears,improvedcashflowsfromstrongdemand,utilisationofadditionalradialcapacitybeing
http://www.thehindubusinessline.com/features/investmentworld/eightstocksthatwillgainfromslidingoil/article6535372.ece?css=print

2/3

12/9/2014

Eightstocksthatwillgainfromslidingoil|BusinessLine

installedandlowinputcostsareexpectedtobringdownthedebttoequityratiofromabouttwotimesnow.Withmany
tyrestocksrunningupbetweentwotofivetimesinthelastoneyear,JKTyrealsoprovidessomevaluationcomfort.
Unlikemostothers,itisstillatadiscounttobiggerplayerssuchasApolloTyres,tradingataboutninetimestrailing
12monthconsolidatedearnings.
Toreaphighermargins
StateownedfertilisermakerGSFC,whoseoperatingprofitmargindeclinedbyalmost3percentagepointsin201314
afterpricesofkeyrawmaterialssuchasbenzeneincreasedsharply,mayheaveasighofreliefnow.Thankstothefallin
crudeprices,theglobalpriceofbenzeneakeyrawmaterialforthecompanysflagshipchemicalproductcaprolactam
isbeginningtocooloff.FromtheJune2014peakof$1,420atonne,thepriceofbenzene(Korea)hasfallenbyover
18percentto$1,160atonnenow.Tomanufactureonetonneofcaprolactam,aboutatonneofbenzeneisrequired.In
201314,GSFCproduced84,856tonnesofcaprolactamitssalesaccountedfor18percentoftotalrevenues.
Evenasbenzenepricesdeclinedsharplyinthelastfourmonths,thepriceofcaprolactamsawamarginal6percentfall
to$2,150atonne.Benzeneimportsaccountedforalmost25percentofGSFCsrawmaterialcostin201314.
Moderationinbenzenepricesby$50atonnewilladdabout2030croretoGSFCsoperatingprofit.
Caprolactam,whichisusedtomanufactureautomobiletyrecord,shouldbenefitfromanincreaseindiscretionary
spend,oncetheglobaleconomyreturnstothegrowthpath.
Inadditiontobettermarginsforitschemicalssegment,higherfertilisersalesin201415followingareductionin
inventorywithdealersandavailabilityofphosphoricacidfromtheTunisianjointventureTifertshouldaddtoGSFCs
profits.Capitalinvestmentofover2,000croreoverthenextoneyearinfacilitiessuchasthe1,650tonnesperdaydi
ammoniumphosphateplantandnylon6plantshoulddrivethecompanyslongtermgrowth.
Apromisingpackage
AnFMCGcompanymayseemanunlikelycandidatetobenefitfromlowercrudeoilprices.Butpetroleumderivatives
formtherawmaterialforpackagingtubes,bottles,covers,Styrofoam,andsoon,fordiapers,detergents,shampoos,
cosmeticsandperfumes.
ColgatePalmoliveIndiaisoneofthekeybeneficiariesoflowerpackagingcosts,whichformafourthoftotalraw
materialconsumed.Colgatedominatesthetoothpaste(57percentmarketshare)andtoothbrush(43percentmarket
share)segmentsthatareessentialinnatureandswallowupasmallshareofconsumerwallets.Thishasalloweditto
growsalesatahealthyclipof1215percentinthepastseveralquarters,thoughvolumegrowthisstartingtowearthin
fromtheMarch2014quarter.
ItalsofoughtoffcompetitionfromHindustanUnilever(PepsodentandCloseUp)andP&G(OralB).Butthehigherad
spendandpromotionthisentailsithasinchedupto18percentofsalesbytheJune2014quarterfromthe1112per
centitusedtoaverageshavedoffoperatingmargins.However,lowerotherexpensesproppedupmargins.With
packagingandplasticsturningcheaper,Colgatenowhasmoreroomforadspendbesidesbetteringitsprofitmargins.
Buildingoneconomicrevival
Companiesengagedinplasticsareamongthebiggestbeneficiariesofslidingcrudeprices,beingderivativesofcrudeoil
polymers.SintexIndustriesisamongthelargestlistedplasticsplayerswithadiverseproductportfoliotoboot,inboth
internationalanddomesticmarkets.
Custommouldedplasticsforsegmentssuchasdefence,aerospace,automotivesandsuchform44percentofits
revenues.Another46percentcomesfrombuildingproductsforprefabstructures,monolithicconstructionand
storagetanks.Theprefabsegmentandcustommouldedproductsarethebiggestgrowthdrivers,withannualgrowth
of18and16percent,respectively,inthepastfouryears.Thetwosegmentsalsosportbetterprofitmargins.
Rawmaterialcostshavebeenmovinghigherovertheyearstoreach61percentin201314.Forthefirsthalfofthe
currentfiscal,theycrepthigherto62percentofsales.Lowerforexandotherexpenseshelpedoperatingmargin
improveto16percent.Respiteontherawmaterialfront,apickupinconstructiondemandforlowcosthousing,anda
revivalinindustrialgrowthcanboostthefortunesofSintex.Thecompanyalsohasaportionofrevenuescomingin
fromcottontextilesandinfrastructure.
(ByAnandKalyanaraman,BhavanaAcharya,NalinakanthiV,ParvathaVardhiniC,RadhikaMerwin)
(ThisarticlewaspublishedonOctober26,2014)
Printableversion|Dec9,20144:18:50PM|http://www.thehindubusinessline.com/features/investmentworld/eightstocksthatwillgainfromsliding
oil/article6535372.eceTheHinduBusinessLine

http://www.thehindubusinessline.com/features/investmentworld/eightstocksthatwillgainfromslidingoil/article6535372.ece?css=print

3/3