Brent crude price is nearing $84 a barrel. WTI is nearing $80 a barrel. Can this be the spoilsport for the Indian equity markets?
History shows that whenever crude oil prices have gone up, equities have also gone up simultaneously and whenever they have fallen thereafter, equity has also corrected itself. If that has to be validated, then we are unlikely to see a fall in the market. However, the important aspect would be the economic impact. The economic impact for India in particular is extremely serious because of high raw material prices due to the high energy costs and crude is responsible for that.
The economy’s cost structure is getting into a real good amount of challenge. In my viewpoint, it is a matter of time before global majors come together and start asking the oil producing countries to start increasing the production of crude oil and cool down the prices. The entire crude oil rally in the current system came largely after April 2020 wherein most of the oil producing countries cut down production.
The demand for crude oil is growing but it is not growing at a very high speed. At the same time, due to the supply constraints, crude oil prices have remained firm. World majors would probably come together, cool down the prices of crude oil and eventually cool down the prices of other commodities. That is going to be the play that is likely to be seen but as of now, many companies will be experiencing the higher cost structure in particular in the second half of the financial year.
Till the first half, most of the guys would have a higher amount of inventory carried into their balance sheets. I guess the real impact of cost pressure would come in the second half of the financial year. Some of the businesses will have to be watched very carefully in this particular period. So demand may not be affected immediately, but cost pressures would come into play.
How should one play this theme on the stock markets? JP Morgan has made a case about how the EM equities median return was plus 19% and it outstripped the developed markets as well.
Yes it is and as I said, whenever crude oil prices have gone up in the past. India in particular has done better. Due to higher crude oil prices, all commodity prices increase and that results in better corporate profits for those companies which are into commodity play and that is the reason we are seeing the market rallying in this situation.
But as I also said, the consuming industry of the commodity and particularly energy businesses are going to be affected with the margin. In my view, many of these businesses where the consumers are seeing symptoms of demand slowing down are not out of place.
In this kind of scenario, how do you play this? In my view, it is safer to look at those companies which are less dependent on higher cost of power. If that is the case, then probably we are relatively better off in a market like this.
But if one is playing on commodity, then one will have to be extremely sharp and fast in trading the commodity in and out. In crude oil, the upstream businesses would remain relatively stronger than downstream and gas distribution businesses where the margins are likely to get affected.
What is the logic in buying exchange stocks? Is there merit in buying IEX, MCX?
Currently a huge amount of trading is happening on the exchange platform due to the extraordinary situation in which most of the commodities are traded including the utilities and power commodities. That is the reason for which we are seeing the sharp rise in the business on the exchange platform. I would not say that purely for this reason, one should be buying into the exchange stocks.
In my view point, the exchange stocks remain long-term plays. As we see greater financialisation of assets, many of the exchange companies are likely to show relatively better performance — both on the volume front as well as on the amount of market capitalisation or the assets that it would be handling.
So from that perspective, plus the fact that most of the exchanges are now allowed to operate different commodities, different securities simultaneously, many of their assets are likely to join the race including insurance. So from that perspective, one would like to look at these companies individually.
We may have talked about MCX and IEX, but I would think that as a whole basket one should look at these particular companies which are there in the marketplace
Why do you think the Birlas are so keen to keep Vodafone afloat and infuse another Rs 10,000 crore?
That is a big question and one is not getting a completely convincing answer on this particular subject. Even though, the world would say that we need three or four companies in telecommunication, I always ask the question whether these three or four companies would keep on investing simultaneously the amount of money which is required?
Look at Bharti’s case. Bharti will have to significantly pump money into the infrastructure because we already have the telecommunication part of the infrastructure. The data part of the infrastructure and applications related to that will ultimately drive the business. There is a significant amount of gap against what Jio has achieved.
is last in the rank and BSNL is nowhere. In such a situation, survival is going to be a very big challenge for these companies. A significant amount of money will have to be invested as the business models are changing very fast. I don’t think we are going to easily increase the ARPU. More business is happening on the data traffic and the data is going to be consumed by the applications for the service on platforms and that is where Indian companies are lagging behind. It will be interesting to watch out for the thesis and narrative of the Birla Group or the purpose of putting more money into Vodafone Idea.