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India Strategy
Rising crude, interest rates:
Winners and Losers
�� Cash rich companies, exporters to gain
Rising crude prices as well as rising interest rates manifest itself in our worries on
the Indian market – inflation, slowing economy and earnings downgrades. In this
report, we have tried to quantify the sensitivity of earnings of companies to oil
prices, rupee depreciation and interest rates. Winners according to this metric are
software companies like HCL Tech, Infosys, TCS and pharma companies like
Lupin Labs. Losers are companies like Jet Airways, Spice Jet, Pantaloon, Apollo
Tyres and India Cement.
#1: Direct impact from crude relatively limited
Crude prices have risen nearly 50% over the past 6 months. However the direct
impact of rising crude prices on companies is limited to only some sectors like
(a) airlines, (b) all oil PSU, (c) companies with oil based raw materials like
Reliance, Apollo Tyres, Asian Paints etc and (d) companies like India Cement
where fuel costs go up. Other sectors like autos may see some hit on demand
due to higher running costs. Rising metal prices hurt auto and infra companies
more than oil. While PSU exploration companies are not gainers unless
Government does not pass fuel costs to them, private sector E&P players gain.
Suzlon could see increased orders due to rising crude prices.
#2: but rupee depreciation: +ve for Software, Pharma,
However, rising crude oil prices will lead to rupee depreciation and also further
increase pressure on interest rates. Software companies (Infy, TCS, Wipro etc)
should gain on Rupee depreciation as do pharma exporters like Lupin.
Commodity players like Reliance, Tata Steel, Hindalco etc gain due to higher
landed cost. Losers would be India Cement, Apollo Tyres, auto names (Maruti,
Hero Honda) and airline stocks (Jet Airways, Spice Jet).
#3: Levered companies vulnerable on rising interest rates
Interest rates are up 100-200 rates over past year and we expect rates to rise
further by around 100 bps over the next year. Firstly, this could negatively impact
demand in sectors like autos, real estate as well as hurt profitability of infra
projects. Secondly, DCF based valuations could reduce as investors provide for
higher risk free rates and cost of debt. Lastly, there is also a direct impact of
higher interest cost on companies. The companies impacted here by higher
costs are:
Losers: India Cement, Pantaloon, Suzlon, JPA, Jet Airways & United Spirits
Gainers: Grasim, ACC, Maruti, Infosys and Ambuja
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Strategy
Rising crude, interest rates:
Winners and Losers
�� Cash rich companies, exporters to gain
Rising crude prices as well as rising interest rates manifest itself in our worries on
the Indian market – inflation, slowing economy and earnings downgrades. In this
report, we have tried to quantify the sensitivity of earnings of companies to oil
prices, rupee depreciation and interest rates. Winners according to this metric are
software companies like HCL Tech, Infosys, TCS and pharma companies like
Lupin Labs. Losers are companies like Jet Airways, Spice Jet, Pantaloon, Apollo
Tyres and India Cement.
#1: Direct impact from crude relatively limited
Crude prices have risen nearly 50% over the past 6 months. However the direct
impact of rising crude prices on companies is limited to only some sectors like
(a) airlines, (b) all oil PSU, (c) companies with oil based raw materials like
Reliance, Apollo Tyres, Asian Paints etc and (d) companies like India Cement
where fuel costs go up. Other sectors like autos may see some hit on demand
due to higher running costs. Rising metal prices hurt auto and infra companies
more than oil. While PSU exploration companies are not gainers unless
Government does not pass fuel costs to them, private sector E&P players gain.
Suzlon could see increased orders due to rising crude prices.
#2: but rupee depreciation: +ve for Software, Pharma,
However, rising crude oil prices will lead to rupee depreciation and also further
increase pressure on interest rates. Software companies (Infy, TCS, Wipro etc)
should gain on Rupee depreciation as do pharma exporters like Lupin.
Commodity players like Reliance, Tata Steel, Hindalco etc gain due to higher
landed cost. Losers would be India Cement, Apollo Tyres, auto names (Maruti,
Hero Honda) and airline stocks (Jet Airways, Spice Jet).
#3: Levered companies vulnerable on rising interest rates
Interest rates are up 100-200 rates over past year and we expect rates to rise
further by around 100 bps over the next year. Firstly, this could negatively impact
demand in sectors like autos, real estate as well as hurt profitability of infra
projects. Secondly, DCF based valuations could reduce as investors provide for
higher risk free rates and cost of debt. Lastly, there is also a direct impact of
higher interest cost on companies. The companies impacted here by higher
costs are:
Losers: India Cement, Pantaloon, Suzlon, JPA, Jet Airways & United Spirits
Gainers: Grasim, ACC, Maruti, Infosys and Ambuja
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