West Asia tensions rattle Dalal Street; pharma and metals buck the trend

Mumbai: The escalation of the conflict in West Asia spilled over to India, fuelling investor uncertainty and dragging down all sectoral indices on Monday, with the exception of pharmaceuticals and metals.

Export-facing sectors and those reliant on crude oil and its derivatives along with those sourcing raw materials from the Gulf through the sea route are expected to be adversely hit by the unfolding geopolitical tensions and the disruption to trade and commerce through the crucial Strait of Hormuz.

Oil and Gas

Oil and gas stocks are especially vulnerable to price fluctuations as any increase in these two commodities inflates costs for oil marketing companies such as Hindustan Petroleum Corp (HPCL) and Bharat Petroleum Corp (BPCL) which source crude and sell refined fuels.

Upstream companies like ONGC and Oil India on the other hand benefit from rising crude oil prices as they sell crude-higher prices mean better realisations and improved profit margins.

Brent crude futures climbed more than 8% to $78.8 on Monday.

"Although downstream OMCs are witnessing corrections due to a spike in crude oil, it is also likely to cool off in a similar fashion once the conflict fizzles out in the near term," said Dharmesh Kant, head of research at Cholamandalam Securities. He said while crude prices are trending higher, the conflict is expected to be contained in the next few weeks and is currently not a destabilising factor for India.

Shares of HPCL and BPCL fell 3.3% and 2.8% respectively on Monday. Oil India and ONGC closed higher. The ongoing volatility is expected to reflect in the oil and gas sector as the Strait of Hormuz is a conduit for about 20-25% of global oil trade, said Swarnendu Bhushan, co-head of institutional research at Prabhudas Lilladher.

"The conflict is not expected to be long drawn but till tensions continue, crude oil prices are expected to remain volatile," said Bhushan. "In this context, upstream companies like ONGC and Oil India could benefit from higher crude prices."

Tourism and Aviation
Sectors which depend on crude oil like aviation could also remain under pressure till the geopolitical tensions persist, said analysts.

Aviation companies such as InterGlobe Aviation which runs IndiGo airline, and SpiceJet slumped around 6% each while airport operator GMR tumbled 4.1%. The Nifty Tourism Index slid 3.3%.

"Travel and tourism are hit and are expected to witness a structural shift since Dubai which was perceived to be the safest business destination came under Iran's retaliatory attacks," said Kant. He said aviation as an adjacent industry could see adverse impact due to flight cancellations besides higher crude prices.

Specialty Chemicals
Specialty chemical stocks including Gujarat Fluorochemicals dropped 4.8% while Godrej Industries and UPL shed 3.1% and 2.3% respectively. Pidilite Industries and SRF declined around 1% each.

"Specialty chemical companies could also be impacted as the input materials for these are crude derivatives," said Bhushan.

Kant said specialty chemicals could face disruptions since they import a large amount of raw materials through the Strait of Hormuz, and the current scenario is expected to curtail profitability. "India has a significant share of rice trade exports with Iran which will be impacted; other export facing sectors like shrimp and animal feed could also face pressure," he said.