Crude oil and coal prices have shot up sharply in the last few months and the impact would not be limited to inflation but could hit certain stocks and sectors.
Crude oil and coal prices have shot up sharply in the last few months and the impact would not be limited to inflation but could hit certain stocks and sectors, said analysts Bank of America Securities. Brent crude touched $80 a barrel earlier this week and continues to remain in touching distance of the same while coal prices are also up 15% since August. BofA analysts see limited immediate impact of the rising price on headline CPI prints but expect 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.
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Along with Cement companies, BofA also believes paints sector stocks could be affected along with the aviation industry as they face cost headwinds. Additionally, commercial vehicle demand could be hit as fuel accounts for more than 50% of costs for truck operators. BofA believes this could hit transport NBFCs as well.
Who could benefit
With coal prices rising and tightening of demand-supply balance in China, the foreign brokerage firm believes Coal India could benefit. “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 said. Hindalco is also A top pick for BofA analysts on hopes of rising earnings in the coming financial year.
Tata Power is also expected to be a beneficiary of the rising prices of coal as it is expected to gain from higher profits 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 said.