Oil prices are falling; should you buy auto, paint stocks?

"From a price correction point of view, the worst seems to be over for cement stocks UltraTech and some of the regional players like Ramco Cement and Dalmia Bharat. For those who have 6 months, 12 months kind of a view, a 25-30% cut in the cement stock prices provides a good entry point,” says Hemang Jani, Equity Strategist & Senior Group VP, MOFSL.

The big talking point is the 29% cool-off from the recent peak in crude prices. It has come down 13% in just the last two trading sessions. Though $100 per barrel is still an elevated level, how to approach the crude sensitives? Should one start buying autos, paints?
We have seen significant downgrades in the earnings of auto and paint companies, the sectors which got affected the most by the higher crude prices. Tyre companies and oil marketing companies have their own dynamics because a lot depends upon the timing of the price increase and the extent of price increase.

But other than that, we have seen a significant negative sentiment and downgrades for these sectors. Banking does not have a very direct correlation with crude, but given the global markets and the sentiment, there has been a good amount of weakness. We do see a case of rebalance there wherein we will see renewed buying in the banking names. Also in the case of paint companies like Asian Paints, Berger Paints, Pidilite, tyre companies also we have some positive news around PLI for some of the auto companies.


That also will have a positive rub off for names like Maruti etc. Overall, some interest will be back in these names and there is going to be some rebalancing at the portfolio level wherein the metals or the crude beneficiaries will have some sort of a knock down and these guys will have some kind of a bump up.

There is news of Zomato acquiring Blinkit in a stock deal. There are a lot of moving parts here. Does it anyway increase near term overhang on Zomato?
For some of these start-ups, stock prices have fallen from their all time high levels and gone down by 30-40-50%. We are getting incremental negative news flow. In the case of Zomato, we have this Blinkit news where the company is increasing their investment at a time when things are not really looking great for the entire startup space. Paytm also had some negative news. These things are not going down well and might provide some sort of negative tick for these companies.

Despite such a big shaveoff, in the current environment, people would prefer some known companies which have already corrected and we will have better opportunities. So, we would not really want to go into some of these names even though they have corrected quite a lot.

Jubilant Foodwork has been falling after CEO Pratik Pota’s resignation. Should one not buy Jubilant Foodworks just because it has fallen?
I could give another example. Even for Godrej Consumer, Mr Sudhir Sitapati took over in the last six months or so and we have seen positive reaction both in terms of stock price as well as the company’s performance. There are many such interesting instances where there are both positive and negative impacts when a new management comes over. There are a lot of positive expectations from the investor community and the company's operating performance also has reflected that.

Now coming to Jubilant Foodwork in particular, we need to bear in mind that in the last 15 to 18 months because of the Covid impact and the fact that the entire QSR space and particularly the names which had built a very solid online platform to deliver have actually benefited. The performances have been pretty good for Jubilant.

Our sense is that the structural story for QSR is here to stay. If you look at many other companies in the similar space in the last two-three quarters, things are looking much better and with people going to malls and going out, we will find the traction getting better. We think this is going to be some sort of a kneejerk reaction by the market because of the kind of work that Mr Pota had done, but we do not see this as a major negative development for the company and even otherwise, the stock had corrected about 15-20%. We find this as a very attractive entry point for Jubilant Foodworks for the kind of business model delivery channel and franchise that it enjoys. We continue to have a positive view over there.

What is the outlook when it comes to cement? Recent brokerage notes are of the view that after a rough Q3, things are improving as demand picks up and efficiency is improving. Are trends looking positive?
Cement as a space was affected very badly by whatever happened in the last two quarters. So, business-wise things were not looking that great. Q3 has not been that good in terms of volume growth. They have not been able to take a significant price hike and they have to deal with multiple headwinds in terms of the petcoke, in terms of other crude related raw material, etc.

So, from a price correction point of view, we find that the worst seems to be over for names like UltraTech and maybe some of the regional players, maybe Ramco Cement and Dalmia Bharat. But how long it will take to see the better numbers is not very clear. We think that for those who have 6 months, 12 months kind of a view, a 25-30% cut in cement stock prices provides a good entry point. It remains to be seen how long we will have to wait for actual numbers reflected in the quarterly updates.

What is the story with Linde India? For the stock to clock an all-time high in the current market scenario, what is really moving up behind this story?
We do not cover it but I understand that this is a very unique company which is into industrial gases and with the EV and the hydrogen and green energy themes playing out globally, this is one of the few companies globally which has the hydrogen technology and which is operational at many places.

They are in an advanced stage to rollout the fuel network. Globally also, the company has done well. In India, there was a merger of Praxair and Linde which is at the final leg of regulatory approvals. The performance of the company has been extremely good, mainly because of the kind of uptick that we have seen in the metal space and the floating stock is extremely low – hardly 13-14% as 75% is owned by promoters and then there are some large HNI investors. So it is a very unique company which some people may want to own from a 2-3-year view and who have a liking for green energy, etc. There is a lot of interest and yesterday’s volume was in excess of 20 lakh. We need to see the delivery component but this was an all-time high delivery volume.