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Scenarios for Crude Oil
In this report, we have scanned 3 extreme scenarios for
crude, and identified key stocks which are most/ least
vulnerable in these scenarios:
Crude at USD 130 for much of FY12 and the Govt fully absorbs
it into the Fisc, ie no deregulation.
Crude at USD 130 for much of FY12 and the Govt increases
prices of diesel by a politically palatable Rs 2-4, AND gives a
directional roadmap.
Crude has seen much speculative activity, even more than in
2008, and hence moves down to USD 80 by end of FY12 as
things ease in MENA (refer chart alongside)
Crude@130 (Opposite directionally holds for Crude@80*)
HIDE IN: IT (Infy, TCS), Pharma (Sun, Ranbaxy, DRL, Cipla, Lupin), ITC, Sun TV, Cairns, RIL, HDFC Bk, Coal India
AVOID: OMCs (BPCL, HPCL, IOC), PSU Banks (SBI, OBC, Corp bank), Engg/ Infra (JPA, HCC, Punj Lloyd, BHEL), Power (JSW Energy,
JPVL), Auto (TAMO), Cement (ACC, Ambuja, Ultratech, Shree Cem), Realty (DLF). FMCG & print media also get affected.
Partial dereg vs no Govt action @ 130: pressure on OMCs to ease; also as interest-rate pressures would ease,
pressure on PSU Banks would be limited to the extreme cases mentioned above. With dereg, all 4w auto cos (not
just TAMO) would also be impacted. And Infra-spend would be mostly Govt-led, so those dependant largely on pvt
sector spend to be particularly affected
Macro impact of these 3 Scenarios
Scenario 1: Crude@130 & Govt inaction:
As the Govt will take the impact on its B/S to cushion growth and inflation,
Fiscal deficit will shoot up by 1.3% to 5.9% of GDP (vs 4.6%)
CAD: Higher oil prices will obviously add to India’s trade deficit, however CAD impact may be mitigated by lower non-oil demand (due to
weaker economic growth) and stronger remittances and software exports. However, if all of these remain unchanged, CAD will rise by 1.7%
to 4.7% of GDP (vs 3%),
10 yr G-Sec rates would spike: while difficult to quantify, it spiked by ~2% from the year’s avg when crude touched all-time high of USD 146
Scenario 2: Crude@130 & Govt partial dereg:
GDP could slow down by ~20 bps with a lag of 12 mths,
Fisc: At Rs 2.5 hike in diesel prices, Fiscal Deficit will shoot up less, by 1.2%, to reach 5.77% of GDP. Assuming a diesel hike of Rs 3 & 4,
fisc deficit to 1.15% (5.75% of GDP) & 1.1% (5.7% of GDP) respectively
Inflation: WPI inflation will rise by~30 bps directly with a Rs 2.5 hike & by 50 bps with a Rs 4 hike in diesel prices
Scenario 3: Crude@80:
Inflation and interest rate worries will abate while incremental Fiscal deficit impact will be only 25 bps (4.85% of GDP) as the Govt
will still require to additionally provide for Rs 230 bn if crude averages USD 80
Impact of high Crude Oil on India Inc.
The effect of Crude oil spiking on Indian Cos is quite complex, as it depends on what Govt decides, ie pass on to
Consumers v/s absorb itself (affects interest rates through the Fiscal deficit) v/s load on to Oilngas Cos. Besides
that, there are various other derivative effects which affects various Sectors in different indirect ways.
But before delving into individual Cos, a reason-wise broad cut is understandable from the following break-up of
Contribution of Sensex Cos to the Sensex EPS growth in FY12, as follows. The broad reasons noted in the next slide
for this, are then used to classify the list of most vulnerable Cos in the rest of this note
Sectoral Impact in order of importance…
A) Interest rate sensitives:
All Banks are affected thru higher provisioning (esp where high restructured assets), and some through MTM risk on the bond
book (esp pub sr with high AFS portion & duration) & on margins thru their ability to pass on rate hikes (esp if low CASA).
Auto Cos are affected more thru demand drop where a large part is financed (90% for CVs) rather than interest rate rises.
Realty Cos are affected both thru demand and debt costs, but are more dependant on the level of capital values.
B) Govt Policy related:
Effect on PSU Oilngas Cos are thru subsidy burden vs price-hikes allowed, while the pvt exploration ones benefit on account of
relative allocation by investors. Effect on naphtha/ FO/ LSHS based Urea fertiliser cos is similar.
Power/ engg/ infra cos are affected thru various means, ie:
a) macro outlook delaying projects and derived demand,
b) interest and RM costs affecting their working capital requirements and thus, ability to take further orders (NOTE historically,
international prices of crude & coal show a very high correlation),
c) Cos requiring equity raisings unable to do so as equity liquidity dries up.
Effects on Manufacturing Cos are similar as above, though not to the same degree. Similarly, while Cement Cos are hit by both
costs and demand, impact is not as much as engg/ infra as most demand is from households & overall growth is shielded by
the Govt.
… Sectoral Impact in order of importance
C) Domestic Secular:
Oil prices affect oil-derivative costs directly eg paints. Moreover, virtually all soft commodities are affected thru oil’s substitution
effect and as farm input costs, thus affecting FMCG inputs. Generally they can pass on these costs, but current competitive
intensity is too high to take that for granted. FMCG (ex ITC) margins are dramatically affected by rising crude.
Effect on Telecom is marginal, mainly thru interest costs as they have sizeable debt.
D) Global related:
Metal prices usually have a strong correlation to crude; hence any global demand degrowth is more than offset by higher
realisations
LEAST AFFECTED are IT/ Pharma. However, as the US Consumer is currently the world’s main growth engine, affecting
manufacturing (China), commodities (Brazil, Russia), etc, some marginal effect could be felt on IT/ pharma Cos thru slower
world growth. However, this is MORE than offset by their increased defensive PE and higher INR realisations as the USD
appreciates relative to other currencies. For some pharma cos, oil-derivatives are a significant part of costs.
Crude@130
Sectors partially affected:
FMCG earnings will be impacted by rising commodity costs alongside the current environment of weakening pricing power due to
competition. Most affected is HUL due to least pricing power, & least is ITC.
Resources prices usually have a strong correlation to Oil, with increased realisation offsetting any decreased demand. Tata Steel
and Hindalco are vulnerable due to high leverage, while Coal India is least vulnerable, while HZL benefits from silver.
Least affected sectors: IT, Pharma, Telecom, Media. However, some Cos relatively affected in these sectors due to cost
pressures are: Print media (DB Corp, Jagran, HT), Jubilant Life.
While average G-Sec yields have remained below 8% even in the years when crude hit an all time high of USD 146,
there have been ST spikes in the 10 yr yield ie it hit 9.5% when crude spiked as a result of oil cos rushing in to
borrow more money
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Scenarios for Crude Oil
In this report, we have scanned 3 extreme scenarios for
crude, and identified key stocks which are most/ least
vulnerable in these scenarios:
Crude at USD 130 for much of FY12 and the Govt fully absorbs
it into the Fisc, ie no deregulation.
Crude at USD 130 for much of FY12 and the Govt increases
prices of diesel by a politically palatable Rs 2-4, AND gives a
directional roadmap.
Crude has seen much speculative activity, even more than in
2008, and hence moves down to USD 80 by end of FY12 as
things ease in MENA (refer chart alongside)
Crude@130 (Opposite directionally holds for Crude@80*)
HIDE IN: IT (Infy, TCS), Pharma (Sun, Ranbaxy, DRL, Cipla, Lupin), ITC, Sun TV, Cairns, RIL, HDFC Bk, Coal India
AVOID: OMCs (BPCL, HPCL, IOC), PSU Banks (SBI, OBC, Corp bank), Engg/ Infra (JPA, HCC, Punj Lloyd, BHEL), Power (JSW Energy,
JPVL), Auto (TAMO), Cement (ACC, Ambuja, Ultratech, Shree Cem), Realty (DLF). FMCG & print media also get affected.
Partial dereg vs no Govt action @ 130: pressure on OMCs to ease; also as interest-rate pressures would ease,
pressure on PSU Banks would be limited to the extreme cases mentioned above. With dereg, all 4w auto cos (not
just TAMO) would also be impacted. And Infra-spend would be mostly Govt-led, so those dependant largely on pvt
sector spend to be particularly affected
Macro impact of these 3 Scenarios
Scenario 1: Crude@130 & Govt inaction:
As the Govt will take the impact on its B/S to cushion growth and inflation,
Fiscal deficit will shoot up by 1.3% to 5.9% of GDP (vs 4.6%)
CAD: Higher oil prices will obviously add to India’s trade deficit, however CAD impact may be mitigated by lower non-oil demand (due to
weaker economic growth) and stronger remittances and software exports. However, if all of these remain unchanged, CAD will rise by 1.7%
to 4.7% of GDP (vs 3%),
10 yr G-Sec rates would spike: while difficult to quantify, it spiked by ~2% from the year’s avg when crude touched all-time high of USD 146
Scenario 2: Crude@130 & Govt partial dereg:
GDP could slow down by ~20 bps with a lag of 12 mths,
Fisc: At Rs 2.5 hike in diesel prices, Fiscal Deficit will shoot up less, by 1.2%, to reach 5.77% of GDP. Assuming a diesel hike of Rs 3 & 4,
fisc deficit to 1.15% (5.75% of GDP) & 1.1% (5.7% of GDP) respectively
Inflation: WPI inflation will rise by~30 bps directly with a Rs 2.5 hike & by 50 bps with a Rs 4 hike in diesel prices
Scenario 3: Crude@80:
Inflation and interest rate worries will abate while incremental Fiscal deficit impact will be only 25 bps (4.85% of GDP) as the Govt
will still require to additionally provide for Rs 230 bn if crude averages USD 80
Impact of high Crude Oil on India Inc.
The effect of Crude oil spiking on Indian Cos is quite complex, as it depends on what Govt decides, ie pass on to
Consumers v/s absorb itself (affects interest rates through the Fiscal deficit) v/s load on to Oilngas Cos. Besides
that, there are various other derivative effects which affects various Sectors in different indirect ways.
But before delving into individual Cos, a reason-wise broad cut is understandable from the following break-up of
Contribution of Sensex Cos to the Sensex EPS growth in FY12, as follows. The broad reasons noted in the next slide
for this, are then used to classify the list of most vulnerable Cos in the rest of this note
Sectoral Impact in order of importance…
A) Interest rate sensitives:
All Banks are affected thru higher provisioning (esp where high restructured assets), and some through MTM risk on the bond
book (esp pub sr with high AFS portion & duration) & on margins thru their ability to pass on rate hikes (esp if low CASA).
Auto Cos are affected more thru demand drop where a large part is financed (90% for CVs) rather than interest rate rises.
Realty Cos are affected both thru demand and debt costs, but are more dependant on the level of capital values.
B) Govt Policy related:
Effect on PSU Oilngas Cos are thru subsidy burden vs price-hikes allowed, while the pvt exploration ones benefit on account of
relative allocation by investors. Effect on naphtha/ FO/ LSHS based Urea fertiliser cos is similar.
Power/ engg/ infra cos are affected thru various means, ie:
a) macro outlook delaying projects and derived demand,
b) interest and RM costs affecting their working capital requirements and thus, ability to take further orders (NOTE historically,
international prices of crude & coal show a very high correlation),
c) Cos requiring equity raisings unable to do so as equity liquidity dries up.
Effects on Manufacturing Cos are similar as above, though not to the same degree. Similarly, while Cement Cos are hit by both
costs and demand, impact is not as much as engg/ infra as most demand is from households & overall growth is shielded by
the Govt.
… Sectoral Impact in order of importance
C) Domestic Secular:
Oil prices affect oil-derivative costs directly eg paints. Moreover, virtually all soft commodities are affected thru oil’s substitution
effect and as farm input costs, thus affecting FMCG inputs. Generally they can pass on these costs, but current competitive
intensity is too high to take that for granted. FMCG (ex ITC) margins are dramatically affected by rising crude.
Effect on Telecom is marginal, mainly thru interest costs as they have sizeable debt.
D) Global related:
Metal prices usually have a strong correlation to crude; hence any global demand degrowth is more than offset by higher
realisations
LEAST AFFECTED are IT/ Pharma. However, as the US Consumer is currently the world’s main growth engine, affecting
manufacturing (China), commodities (Brazil, Russia), etc, some marginal effect could be felt on IT/ pharma Cos thru slower
world growth. However, this is MORE than offset by their increased defensive PE and higher INR realisations as the USD
appreciates relative to other currencies. For some pharma cos, oil-derivatives are a significant part of costs.
Crude@130
Sectors partially affected:
FMCG earnings will be impacted by rising commodity costs alongside the current environment of weakening pricing power due to
competition. Most affected is HUL due to least pricing power, & least is ITC.
Resources prices usually have a strong correlation to Oil, with increased realisation offsetting any decreased demand. Tata Steel
and Hindalco are vulnerable due to high leverage, while Coal India is least vulnerable, while HZL benefits from silver.
Least affected sectors: IT, Pharma, Telecom, Media. However, some Cos relatively affected in these sectors due to cost
pressures are: Print media (DB Corp, Jagran, HT), Jubilant Life.
While average G-Sec yields have remained below 8% even in the years when crude hit an all time high of USD 146,
there have been ST spikes in the 10 yr yield ie it hit 9.5% when crude spiked as a result of oil cos rushing in to
borrow more money
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