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Crude's rise, rupee's fall looming risks for markets but these 8 stocks may reap benefit

Date: 04-03-2021
Subject: Crude's rise, rupee's fall looming risks for markets but these 8 stocks may reap benefit
With easing concerns over COVID-19 cases and economic activities picking pace, crude oil prices have been rising of late, barring occasional profit-taking.

Brent crude is trading above the $63/bbl mark amid expectations that OPEC and its allies may boost oil supply.

OPEC plus countries agreed to a historic output cut in April 2020 to reduce the supply glut and to shore up prices.

The record cut of 9.7 million barrels a day started on May 1, 2020, but was subsequently scaled back to 7.7 million in August.

Crude oil prices may rise in the near-term. As Ashis Biswas, Head of Technical Research at CapitalVia Global Research pointed out: "Major factors contributing to the rise are increasing demand outlook, production cuts from the OPEC and middle-east tensions which might disrupt the supply."

The recent rise in crude oil prices has kept the Indian currency under pressure. The rupee is now above the 73 mark per dollar.

Historically, rising crude prices and a falling rupee have roiled the mood of the market. Crude affects a number of industries such as aviation, automobiles, logistics players, etc. as they rely on oil as a key raw material. Besides, India is one of the top crude importers and an increase in crude negatively impacts India’s current account deficit.

"With India having a crude oil import dependence of more than 80 percent of its needs, rising global oil prices driven by a global economic recovery in 2021 will see a worsening of India's terms of trade, and put depreciatory pressure on the rupee," Biswas pointed out.

"Rupee depreciation will strengthen the inflationary forces. When inflation rises, prices of goods and commodities shoot up. Therefore, the purchasing power of the rupee falls down. Further, resulting in higher import costs for the country. Failure of a similar rise in the prices of exportable commodities is going to result in a widening of current account deficit (CAD) of the country."

Pharma and IT sector stocks tend to benefit from the rupee's weakness as a significant part of their revenue comes in the US dollar.

Biswas believes 5 stocks - Divis Labs, Cipla, Coforge, Mindtree and TCS - may benefit from the rupee's weakness.

Crude oil prices near the $60/bbl are not seen as a risk for the Indian market but if the rise in crude prices sustains and touches the $70/bbl mark, it will be a risk, experts believe.

"We believe that crude at $60/bbl should not be a problem for India and is unlikely to have any major negative impact on any sectors. However, any increase in crude oil prices to near $70/bbl would lead to upwards pressure on inflations which would be negative for the overall markets and especially rate-sensitive sectors like banking and real estate," said Jyoti Roy, DVP Equity Strategist, Angel Broking.

Crude oil trading above $60/bbl would be positive for upstream companies like ONGC and Oil India, Roy said.

Likhita Chepa, Senior Research Analyst at CapitalVia Global Research also believes that exploration firms such as ONGC and GAIL will benefit from rising crude prices.

However, tyre manufacturers and the chemical stocks may be under pressure because the input prices may rise for them thereby increasing the overall cost of the products.

"Stocks like BPCL, Apollo Tyres and Asian Paints may witness some selling pressure in the near-term," said Chepa.

Keval Bhanushali, CEO at Marwadi Shares and Finance, believes crude may be in the same range or rather see a downward trend so that may not be a big worry on the long-term basis.

The crude prices in the current world are more of the demand-supply management from OPEC.

"Given the economies of these countries, I don't believe they will hold back the cuts for long. As for the current prices and the disinvestment plans of India, I see BPCL as a good beneficiary in the short-term," said Bhanushali.


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