shares to buy | Oil Prices: Given the global crude crash, how will energy, paint and WTO stocks fare?
Some stocks are closely tied to the movement of crude oil prices – energy, paint, stocks of oil marketing companies. Given the type of collapse we are seeing in global commodity prices, including crude, what is your verdict?
Despite the ups and downs of crude, some companies like BPCL, HPCL are all trading at very low valuations. They are likely pricing a crude price around $50-60, but that stock is unlikely to fundamentally rise due to the overhang of the stake sale and the timing of it, and the associated PSU discount.
In the case of Reliance Industries, gross refining margins will be around $12 to $18 depending on the type of crude. Every dollar of increase in GRM adds approximately 4-5% to EPS growth. Reliance Industries is therefore extremely well positioned. All of its other retail, telecommunications businesses are doing well and it’s the good old bread and butter business – the refining business – that will post very strong numbers this quarter.
We were discussing earlier how we see major hiring trends from IT companies like TCS, Infosys, etc. What do you think could be the ripple effect of the same? Which industries or sectors are likely to benefit from the same?
All items related to consumer discretionary, including real estate in some pockets, will continue to experience strong growth. In IT the reported attrition numbers are around 20% odd and in small and midsize businesses it’s probably around 30% and above. There have been cases where lower to mid-level employees have received gifts like cars, bicycles far beyond the actual number of annual salaries.
So this will be reflected in all hotel companies like Mahindra Holidays,
. All of these companies will do well. Second, for the consumer discretionary businesses, it’s going to be a hot summer like Pizza Hut, Jubilant Foodworks, all of those businesses will be doing well, as well as some of the two and four wheel businesses.
There is an order book, but the volumes are low and there is going to be a fair amount of buying of both two-wheelers and four-wheelers with very undemanding valuations. So we will see this advantage of growth in various pockets.
What do you think of Reliance Industries, as this stock has been on a steep rise lately? Do you think more legs in the rally are possible?
Reliance Industries will do well with the GRM we just talked about, it gives an immediate increase in profits and this increase in profits is quite strong because the Reliance Industries Jamnagar refinery is one of the most complex refineries in the world, which means it will have the highest margin among other refineries in India or even Asia. Its profitability will be higher, requiring a higher multiple and second its regular business – retail, telecommunications are doing well and the new green energy venture they are committing over $10 billion in is grossly undervalued . As more details become available this provides a longer term leg of growth. Meanwhile, stronger GRMs provide the short-term growth leg.
There is clearly a renewed optimism in auto stocks lately. Everything from Bajaj Auto to Hero MotoCorp to an M&M looks good. Now some tire stocks are also increasing.
Indeed all of these companies have been hit by automotive and automotive auxiliaries due to high crude prices, the conflict in Ukraine, lockdowns and hopefully as far as lockdowns go, this is the reverse that occurs. The rough broke off but the conflict still continues. But the volume for automakers is at its lowest in many years. They are even below 2018 sales levels and probably around 80-90% of what was sold in 2019.
In 2022, the volumes are much lower. Even though it was a low growth industry in line with inflation, volumes had to be much higher even assuming 5% inflation growth. But it was actually lower than the 2019 figures. In this context, all the commodity prices, the price of metals held back the sector.
Now individual companies like Bajaj Auto, TVS Motors, Hero MotoCorp,
all of these companies have extremely well defined EV programs and so in the short term any time volumes increase now it will support short term growth as EVs still only represent less than 3-4% of global sales. It’s still in its infancy and it’s still the regular gasoline-diesel vehicles that will be sold for the next few years to come. If you look at the multiples, TVS probably trades around 15-16 times, Bajaj Auto trades 14 times, and Hero Motors trades 10 times. These are 40-50% off what they were trading two or three years ago. Fit for many things. all of these stocks – whether TVS Motors, the recently corrected Hero Motors and Bajaj Auto – will all be well over 30-40% a year from now.