Cement companies could be hit the most; every 5 per cent rise in crude and coal prices hits their margins by 100 basis points. Refiners such as ONGC and Oil India would gain the most; every $10 increase in crude prices increases their EPS 10-20 per cent.
Cement companies have 75 per cent of their power and fuel costs exposed to coal, and 40 per cent of road freight costs are exposed to diesel, BofA Securities said in a detailed note. Road freight costs alone account for nearly 70 per cent of cement companies’ total costs.
“We estimate a 5 per cent rise in both coal and diesel costs, which could result in 100 basis points sensitivity to margins, translating to 3.5 per cent (UltraTech, Ambuja) to 4.5 per cent (ACC) Ebitda impact. Companies could try to partially offset this through price hikes around late October and early November as construction activity picks up post monsoon,” BofA Securities said.
The foreign brokerage said fuel accounts for over 50 per cent of costs for truck operators and that a slower rise in truck rentals against spike in diesel prices is likely to impact truckers’ profitability and demand for new commercial vehicles, which would be negative for the transport-focused NBFCs.
Aviation, paints and FMCG firms could also face cost headwinds, BofA Securities said.
“With crude oil and product inventory in the lower half of the five-year range and EIA estimating global crude oil supply growth to lag demand growth in 2021, we see an upside risk to crude oil prices,” HDFC Institutional Equities said.
The domestic brokerage said the increase in Brent crude oil and gas prices should improve realisations and, this in turn, can drive earnings CAGR of 30-54 per cent over FY21-FY23 for ONGC and Oil India.
Every $10 a barrel change in oil price realisation can change ONGC’s FY23E earnings by Rs 7.2 per share or 19.5 per cent and Oil India’s by Rs 8.0 per share or 11.3 per cent, it estimated.
Besides, every $1 per mmbtu change in gas price realisation can change ONGC’s FY23 earnings by Rs 4.5 or 12.3 per cent and Oil India’s by Rs 7.8 or (11 per cent), HDFC Institutional Equities said.
Among other likely gainers is Tata Power, which could come from higher profits in its Indonesian coal mine joint ventures.
“A spike in diesel prices could aid share gains for Concor from road-based logistic operators. Meanwhile, upstream oil & gas companies like ONGC could benefit from higher crude realisations, while the impact could be mixed for OMCs as inventory gains can offset any inability to take immediate price hikes,” BofA Securities said.
The foreign brokerage said tightening of coal demand-supply balance in China would continue to support global thermal coal prices and Coal India could benefit from rising price of imported coal as the spot prices (e-auction) move up.
For Coal India, this brokerage sees 20 per cent growth in volumes in the e-auction market in FY23 with earnings rising by 11.5 per cent for every 10 per cent rise in e-auction prices.
“Besides, shortages and higher power costs (40 per cent in total costs) for Chinese aluminum producers, along with capacity suspensions (2 million tonne or 5 per cent of national capacity suspended, more likely to come) supports our bullish view on LME aluminum. Hindalco is our preferred pick- could see FY23 earnings rise by 1.7 per cent for every $50 per tonne rise in LME,” BofA Securities said.
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