Article

Sectors and Stocks to benefit from fall in crude oil prices

07 Dec 2018 Nikita Bhoota

Crude oil price has tumbled 30% since October 03, 2018 from its year high of $86.3. The correction in crude oil price is led by US waiver for 8 countries to import oil from Iran, higher OPEC production, and rising US production. India will be the major beneficiary of the fall in crude price as it imports 80% of its oil demand. Declining crude prices will cheer the macros by lowering import bill, drop in inflation risk and narrowing current account deficit.

On the business front, fall in crude prices will cut down the operational cost of many companies that use direct crude or crude derivatives as the major raw material. We have discussed the sectors that stand to benefit from the drop in crude prices and have cherry picked the stocks from the respective sectors that will gain the most out of this development.

Sector: Paints

Paint industry uses Titanium dioxide and Monomers (crude oil derivatives) as raw materials. The cost of crude oil component is ~30-35% of the paint companies’ raw material cost. Thus, the drop in crude price will aid the improvement in operational margins of the paint companies. We prefer Asian Paints in this sector.

Asian Paints (APNT)

APNT enjoys 54% market share in India, ahead of Berger and Kansai Nerolac with 18% and 17% share respectively. It derives ~83% revenues (FY18) from decorative segment followed by exports (13%), industrial paints (2%) and home improvement (2%). Further, economic revival and focus on housing segment are expected to push decorative volume growth to double digits from FY19 onwards (~13/11% yoy volume growth in the decorative segment for Q1/Q2FY19). The GST rate cut in paints from 28% to 18% is expected to aid the shift in volumes from unorganised segment. APNT is planning to expand capacity from 1.1mn MT currently to 2.2mn MT over next 1-1.5 years. We project revenue and PAT CAGR of 13.3% and 12.7% respectively over FY18-20E. With moderation in crude inflation and price hike (1.5% effective December 01, 2018, over and above the 2.35% taken on October 01, 2018), we expect pressure on EBITDA margin to taper and project 60bps yoy expansion over FY18-20E to 19.6% in FY20E.

Year

Net Sales (Rs cr)

OPM (%)

PAT (Rs cr)

EPS (Rs)

PE (x)

FY18

16,843

19.0

2,038

21.3

62.0

FY19E

18,947

18.7

2,151

22.4

58.7

FY20E

21,658

19.6

2,589

27.0

48.8

Source: 5paisa Research

Sector: Aviation

Aviation Turbine Fuel (ATF) is the major raw material for the aviation companies. It accounts for ~50% of their operational costs. Thus, the dip in crude prices is a positive for the sector and will improve the profitability of aviation companies. Our recommended stock in the aviation sector is Interglobe Aviation.

Interglobe Aviation (Indigo)

Indigo has a fleet of 189 aircrafts (50 A320neo + 127 A320ceo + 12 ATR), which is the largest in India. Its ~87% revenue typically comes from passenger segment (91% domestic and 9% international), while ancillary and cargo segments constitute the rest. IndiGo is transforming strategically to gain market share (currently 42.4%) through shifting from pure sale/leaseback model to buying aircrafts as well as increasing emphasis on shorter-term leases. The airline has sufficient free cash of Rs4,418cr (as on Q2FY19) to fund fleet acquisitions. With relief on Neo engine issues, the company has increased focus on regional routes and is also planning to expand its international network. IndiGo (for Q2FY19) posted its first quarterly loss in several years owing to sharp rise in fuel prices, rupee depreciation and pressure on yield due to intense competitive environment. However, downward revision in ATF prices, led by recent slump in the benchmark crude oil prices are likely to provide some respite to the airline operators including IndiGo. In addition, recovery in rupee will further aid the financial performance of the company. We expect top-line CAGR of 26% (FY18-20E), primarily driven by aggressive capacity addition. However, the company is expected to post loss for FY19E amidst elevated levels of operating expenses and challenging pricing environment.

Year

Net Sales (Rs cr)

OPM (%)

PAT (Rs cr)

EPS (Rs)

PE (x)

FY18

23,021

12.8%

2,242

58.3

17.5

FY19E

28,262

-5.8%

-1,121

-29.2

-35.0

FY20E

36,417

1.3%

213

5.5

184.4

Source: 5paisa Research

Sector: Tyres

Tyre industry uses crude derivative products such as synthetic rubber, chemicals and carbon black as key raw materials. Crude derivatives roughly account for ~30-35% of the raw material cost of tyre companies and any increase in these hits the profitability of the companies. Hence, fall in crude prices is positive for tyre companies. We prefer Apollo Tyres in this sector.

Apollo Tyres (ATL)

Apollo Tyres (ATL) is the largest Truck and Bus Radial (TBR) manufacturer in India, ATL continues to dominate TBR market in India with a 30% share and has 15% market share in PCR (Passenger car radial) segment (Q2FY19). Company reported 26% yoy volume growth in India in Q2FY19 led by TBR, PCR, two wheelers and agricultural segments. Despite softening in OEM demand, outlook remains strong as majority sales are derived from after-market. It reported 17% yoy volume growth in Europe led by TBR segment. Capacity at Hungary will ramp up from 7,500 PCR tyres / day currently to 12,000 by end of Q4FY19E. Price hikes taken in September 2018 and November 2018 coupled with cooling oil prices will help improve gross margins. We expect revenue, EBITDA and PAT CAGR of 20%, 28% and 31% respectively over FY18-20E

Year

Net Sales (Rs cr)

OPM (%)

Reported PAT (Rs cr)

Reported EPS (Rs)

PE (x)

FY18

14,840

11.1%

723

12.6

17.9

FY19E

18,622

11.7%

907

15.9

14.3

FY20E

21,467

12.7%

1,237

21.6

10.5

Source: 5paisa Research

Sector: FMCG

Crude oil derivatives form a big chunk of raw material cost for FMCG companies. Some of the crude derivatives used in FMCG business are HDPE for packaging, LAB for detergents and LLP for creams and oil. Drop in LAB and LLP price will benefit detergent and personal care companies, whereas fall in HDPE will reduce the cost of overall sector. We like Jyothy Laboratories in this sector.

Jyothy Laboratories (JLL)

JLL’s portfolio of six power brands – Ujala (fabric whitener), Exo (dish-bar), Maxo (household insecticides), Henko (detergent), Margo (soaps) and Pril (dish-wash) contributed ~89% to revenue in FY18. Ujala enjoys ~77% share in niche fabric whitening segment. JLL aims at doubling its revenue by FY2021E, led by a mix of organic and inorganic growth. The company is exploring acquisition opportunities in regional players in categories where it is already present. JLL is expected to witness volume growth owing to its power brands, newer products (toilet cleaner and Ayurvedic brand extensions) and consistent investment behind brands. Further, amid inflationary environment, the company took ~7% price increase in its detergent portfolio during Q2FY19. Thus, we expect the company to post revenue and PAT CAGR of 11.5% and 18% respectively over FY18-20E. Led by operating leverage and premiumisation, we expect EBITDA margin to expand ~100bps over the same period.

Year

Net Sales (Rs cr)

OPM (%)

PAT (Rs cr)

EPS (Rs)

PE (x)

FY18

1,731

15.7%

186

5.1

36.0

FY19E

1,924

16.2%

213

5.9

31.4

FY20E

2,152

16.7%

259

7.1

25.9

Source: 5paisa Research

Sector: Lubricants

Lubricant companies which use crude oil derivatives like base oil and additives as raw material input have a reason to celebrate. The fall in crude prices will improve the operating margin of the companies in lubricant business. Base oil and additives generally account for 40-50% of the raw material cost. We recommend Gulf Oil Lubricant in this sector.

Gulf Oil Lubricant (GOL)

GOL, a Hinduja group company, supplies wide range of automotive and industrial lubricants, greases, two-wheeler batteries, etc. Gulf Oil Lubricants has been gaining market share in the lubricant industry and is expected to sustain the momentum on the back of increased OEM tie-ups. It has direct tie-ups with OEMs, including Ashok Leyland, Mahindra, Bajaj, Toshiba, etc. Moreover, increased focus on the personal mobility segment will drive volumes (~22% core and ~30% overall volume growth in Q2FY19) and higher salience of the same would lead to improvement in gross margins. GOL’s initiatives on new OEM tie-ups and other B2B customer acquisitions will lead to increase in the market share vs. peers. We expect revenue CAGR of 13% with ramp-up of the newly added capacity at its Chennai plant. We expect EBITDA margin to hover at 17% over FY18-20E and PAT CAGR of 8% over the same period, as the company is expected to remain debt-free at net-debt level.

Year

Net Sales (Rs Cr)

OPM (%)

PAT (Rs cr)

EPS (Rs)

PE (x)

FY18

1,332

17.7%

159

32.0

25.1

FY19E

1,553

16.8%

167

33.6

23.9

FY20E

1,708

17.0%

187

37.6

21.3

Source: 5paisa Research

Research Disclaimer

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Sectors and Stocks to benefit from fall in crude oil prices

07 Dec 2018 Nikita Bhoota

Crude oil price has tumbled 30% since October 03, 2018 from its year high of $86.3. The correction in crude oil price is led by US waiver for 8 countries to import oil from Iran, higher OPEC production, and rising US production. India will be the major beneficiary of the fall in crude price as it imports 80% of its oil demand. Declining crude prices will cheer the macros by lowering import bill, drop in inflation risk and narrowing current account deficit.

On the business front, fall in crude prices will cut down the operational cost of many companies that use direct crude or crude derivatives as the major raw material. We have discussed the sectors that stand to benefit from the drop in crude prices and have cherry picked the stocks from the respective sectors that will gain the most out of this development.

Sector: Paints

Paint industry uses Titanium dioxide and Monomers (crude oil derivatives) as raw materials. The cost of crude oil component is ~30-35% of the paint companies’ raw material cost. Thus, the drop in crude price will aid the improvement in operational margins of the paint companies. We prefer Asian Paints in this sector.

Asian Paints (APNT)

APNT enjoys 54% market share in India, ahead of Berger and Kansai Nerolac with 18% and 17% share respectively. It derives ~83% revenues (FY18) from decorative segment followed by exports (13%), industrial paints (2%) and home improvement (2%). Further, economic revival and focus on housing segment are expected to push decorative volume growth to double digits from FY19 onwards (~13/11% yoy volume growth in the decorative segment for Q1/Q2FY19). The GST rate cut in paints from 28% to 18% is expected to aid the shift in volumes from unorganised segment. APNT is planning to expand capacity from 1.1mn MT currently to 2.2mn MT over next 1-1.5 years. We project revenue and PAT CAGR of 13.3% and 12.7% respectively over FY18-20E. With moderation in crude inflation and price hike (1.5% effective December 01, 2018, over and above the 2.35% taken on October 01, 2018), we expect pressure on EBITDA margin to taper and project 60bps yoy expansion over FY18-20E to 19.6% in FY20E.

Year

Net Sales (Rs cr)

OPM (%)

PAT (Rs cr)

EPS (Rs)

PE (x)

FY18

16,843

19.0

2,038

21.3

62.0

FY19E

18,947

18.7

2,151

22.4

58.7

FY20E

21,658

19.6

2,589

27.0

48.8

Source: 5paisa Research

Sector: Aviation

Aviation Turbine Fuel (ATF) is the major raw material for the aviation companies. It accounts for ~50% of their operational costs. Thus, the dip in crude prices is a positive for the sector and will improve the profitability of aviation companies. Our recommended stock in the aviation sector is Interglobe Aviation.

Interglobe Aviation (Indigo)

Indigo has a fleet of 189 aircrafts (50 A320neo + 127 A320ceo + 12 ATR), which is the largest in India. Its ~87% revenue typically comes from passenger segment (91% domestic and 9% international), while ancillary and cargo segments constitute the rest. IndiGo is transforming strategically to gain market share (currently 42.4%) through shifting from pure sale/leaseback model to buying aircrafts as well as increasing emphasis on shorter-term leases. The airline has sufficient free cash of Rs4,418cr (as on Q2FY19) to fund fleet acquisitions. With relief on Neo engine issues, the company has increased focus on regional routes and is also planning to expand its international network. IndiGo (for Q2FY19) posted its first quarterly loss in several years owing to sharp rise in fuel prices, rupee depreciation and pressure on yield due to intense competitive environment. However, downward revision in ATF prices, led by recent slump in the benchmark crude oil prices are likely to provide some respite to the airline operators including IndiGo. In addition, recovery in rupee will further aid the financial performance of the company. We expect top-line CAGR of 26% (FY18-20E), primarily driven by aggressive capacity addition. However, the company is expected to post loss for FY19E amidst elevated levels of operating expenses and challenging pricing environment.

Year

Net Sales (Rs cr)

OPM (%)

PAT (Rs cr)

EPS (Rs)

PE (x)

FY18

23,021

12.8%

2,242

58.3

17.5

FY19E

28,262

-5.8%

-1,121

-29.2

-35.0

FY20E

36,417

1.3%

213

5.5

184.4

Source: 5paisa Research

Sector: Tyres

Tyre industry uses crude derivative products such as synthetic rubber, chemicals and carbon black as key raw materials. Crude derivatives roughly account for ~30-35% of the raw material cost of tyre companies and any increase in these hits the profitability of the companies. Hence, fall in crude prices is positive for tyre companies. We prefer Apollo Tyres in this sector.

Apollo Tyres (ATL)

Apollo Tyres (ATL) is the largest Truck and Bus Radial (TBR) manufacturer in India, ATL continues to dominate TBR market in India with a 30% share and has 15% market share in PCR (Passenger car radial) segment (Q2FY19). Company reported 26% yoy volume growth in India in Q2FY19 led by TBR, PCR, two wheelers and agricultural segments. Despite softening in OEM demand, outlook remains strong as majority sales are derived from after-market. It reported 17% yoy volume growth in Europe led by TBR segment. Capacity at Hungary will ramp up from 7,500 PCR tyres / day currently to 12,000 by end of Q4FY19E. Price hikes taken in September 2018 and November 2018 coupled with cooling oil prices will help improve gross margins. We expect revenue, EBITDA and PAT CAGR of 20%, 28% and 31% respectively over FY18-20E

Year

Net Sales (Rs cr)

OPM (%)

Reported PAT (Rs cr)

Reported EPS (Rs)

PE (x)

FY18

14,840

11.1%

723

12.6

17.9

FY19E

18,622

11.7%

907

15.9

14.3

FY20E

21,467

12.7%

1,237

21.6

10.5

Source: 5paisa Research

Sector: FMCG

Crude oil derivatives form a big chunk of raw material cost for FMCG companies. Some of the crude derivatives used in FMCG business are HDPE for packaging, LAB for detergents and LLP for creams and oil. Drop in LAB and LLP price will benefit detergent and personal care companies, whereas fall in HDPE will reduce the cost of overall sector. We like Jyothy Laboratories in this sector.

Jyothy Laboratories (JLL)

JLL’s portfolio of six power brands – Ujala (fabric whitener), Exo (dish-bar), Maxo (household insecticides), Henko (detergent), Margo (soaps) and Pril (dish-wash) contributed ~89% to revenue in FY18. Ujala enjoys ~77% share in niche fabric whitening segment. JLL aims at doubling its revenue by FY2021E, led by a mix of organic and inorganic growth. The company is exploring acquisition opportunities in regional players in categories where it is already present. JLL is expected to witness volume growth owing to its power brands, newer products (toilet cleaner and Ayurvedic brand extensions) and consistent investment behind brands. Further, amid inflationary environment, the company took ~7% price increase in its detergent portfolio during Q2FY19. Thus, we expect the company to post revenue and PAT CAGR of 11.5% and 18% respectively over FY18-20E. Led by operating leverage and premiumisation, we expect EBITDA margin to expand ~100bps over the same period.

Year

Net Sales (Rs cr)

OPM (%)

PAT (Rs cr)

EPS (Rs)

PE (x)

FY18

1,731

15.7%

186

5.1

36.0

FY19E

1,924

16.2%

213

5.9

31.4

FY20E

2,152

16.7%

259

7.1

25.9

Source: 5paisa Research

Sector: Lubricants

Lubricant companies which use crude oil derivatives like base oil and additives as raw material input have a reason to celebrate. The fall in crude prices will improve the operating margin of the companies in lubricant business. Base oil and additives generally account for 40-50% of the raw material cost. We recommend Gulf Oil Lubricant in this sector.

Gulf Oil Lubricant (GOL)

GOL, a Hinduja group company, supplies wide range of automotive and industrial lubricants, greases, two-wheeler batteries, etc. Gulf Oil Lubricants has been gaining market share in the lubricant industry and is expected to sustain the momentum on the back of increased OEM tie-ups. It has direct tie-ups with OEMs, including Ashok Leyland, Mahindra, Bajaj, Toshiba, etc. Moreover, increased focus on the personal mobility segment will drive volumes (~22% core and ~30% overall volume growth in Q2FY19) and higher salience of the same would lead to improvement in gross margins. GOL’s initiatives on new OEM tie-ups and other B2B customer acquisitions will lead to increase in the market share vs. peers. We expect revenue CAGR of 13% with ramp-up of the newly added capacity at its Chennai plant. We expect EBITDA margin to hover at 17% over FY18-20E and PAT CAGR of 8% over the same period, as the company is expected to remain debt-free at net-debt level.

Year

Net Sales (Rs Cr)

OPM (%)

PAT (Rs cr)

EPS (Rs)

PE (x)

FY18

1,332

17.7%

159

32.0

25.1

FY19E

1,553

16.8%

167

33.6

23.9

FY20E

1,708

17.0%

187

37.6

21.3

Source: 5paisa Research

Research Disclaimer