Crude oil and coal rates have shot up sharply in the last couple of months and the influence would not be restricted to inflation but could hit specific stocks and sectors, mentioned analysts Bank of America Securities. Brent crude touched $80 a barrel earlier this week and continues to stay in touching distance of the identical though coal rates are also up 15% given that August. BofA analysts see restricted quick influence of the increasing price tag on headline CPI prints but anticipate EPS implications for stocks. “See cost headwinds for Ultratech Cement, Shree Cement, Ambuja Cement, and ACC; benefits for ONGC, Coal India, Tata Power, and Hindalco on higher realizations and CCRI on market share gains.
Sectors & stocks that may suffer
BofA said that interest rate hike on the back of rising commodity prices remains low currently, but they still see earnings implications for select sectors with high exposure to these commodities. “Cement companies, for example, have 75% of their power and fuel costs exposed to coal, 40% of road freight costs (70% of total costs) exposed to diesel. We estimate a 5% rise in both coal and diesel costs could results in 100bps sensitivity to margins, translating to 3.5% (Ultratech, Ambuja) to 4.5% (ACC) EBITDA impact,” they added.
Along with Cement firms, BofA also believes paints sector stocks could be impacted along with the aviation market as they face expense headwinds. Additionally, industrial automobile demand could be hit as fuel accounts for more than 50% of fees for truck operators. BofA believes this could hit transport NBFCs as nicely.
Who could advantage
With coal rates increasing and tightening of demand-provide balance in China, the foreign brokerage firm believes Coal India could advantage. “As tightening of coal demand-supply balance in China continues to support global thermal coal prices, Coal India could benefit from the rising price of imported coal as the spot prices (e-auction) move up. We estimate Coal India to see 20% of its volumes in the e-auction market in FY23 with earnings rising by 11.5% for every 10% rise in e-auction prices,” they mentioned. Hindalco is also A top rated choose for BofA analysts on hopes of increasing earnings in the coming economic year.
Tata Power is also anticipated to be a beneficiary of the increasing rates of coal as it is anticipated to achieve from greater income in its Indonesian coal mine JVs. “Spike in diesel prices could aid share gains for Concor from road-based logistic operators. While upstream oil & gas companies like ONGC could benefit from higher crude realizations, the impact could be mixed for OMCs as inventory gains could offset any inability to take immediate price hikes,” the report mentioned.