Ending Friday On A High

Oil Down Stocks Up

Global oil prices are down BIG TIME. Brent crude has fallen 13% over the last month, from $85 a barrel to $74. So, what’s the deal, and how will it help India? Let’s take a look. 🔍

Prices are currently falling due to a number of global factors. These include:

1) Weakness in US and EU economies, including fears of a recession. The US debt ceiling controversy (now solved), also contributed to the fall. A general rule of thumb: lower economic growth = lower oil demand. 🛢️

2) China’s economic growth has been a concern for most of the year. Hopes of a recovery were dashed earlier this year as well. 👎

3) Mixed signals over whether the global oil supply will reduce. While OPEC+ has promised a cut, cash-strapped Russia doesn’t seem to be playing ball. PS – Moscow’s oil exports shot past pre-Ukraine war levels back in April. 📈

That said, what does all of this mean for India? Since we’re a net importer of crude, a fall in prices is a major POSITIVE. This helps with the country’s current account deficit. ✅

Looking downstream, oil marketing companies like IOC, BPCL & HPCL are also big winners! Why? Because they sell fuel at subsidised prices (usually compensated fully by GOI, but sometimes partly and with a big lag). 👍

Finally, any sector that depends on an oil-derivative product as raw material will see a big boost. This includes the paints industry, the aviation sector and other businesses like tyres, lubricants and even some verticals in the FMCG biz. 💯

In The Pink Of Health

Aurobindo Pharma has been KILLING it lately. After an abysmal 2021-22, the stock is up 51% YTD, easily beating all of its peers. What’s so special about it? And, more, importantly, how far can the rally go? 💉

Most of the current rally is due to a sense that things are starting to turn around for the industry. ICYMI – in 2022, most pharma companies were hit by a triple whammy: a general slowdown in growth after the Covid boom years + price erosion in the US generics biz + high raw material costs. 🤕

Aurobindo has always relied completely on overseas markets. So, when the US and EU struggle, Aurobindo struggles. BUT, that also means when a turnaround is in the offing, the company reaps the benefits. For Aurobindo, generics pricing pressures began to ease from Q3 onwards, which is a positive. Fun fact: revenue of its US injectable biz increased 18% QoQ to $72 million in Q4! Also, raw-material and logistics costs have cooled off sharply. 📊

Another important factor is valuation. Aurobindo historically has been cheaper than its peers. But, the pharma sector’s troubles took things to another level: the stock corrected from Rs ~700 p/sh in January 2022 to Rs 404 p/sh in February 2023. Benign valuations + experts predicting a turnaround boosted the rally. 🚀

Which brings us to the future. The company has a strong pipeline of high-margin, new-gen products. Also, its massive 2,000 cr Penicillin G plant will be commissioned by December 2023. Key monitorables include its speciality biz foray, USFDA clearance for crucial plants & how well the US market does. FYI – Brokerage firm Sharekhan has a target price of Rs 716; +9% from current levels. 💊

Movers and Shakers 

Here’s a look at this week’s top Nifty 500 movers. Brightcom Group took the pole position after rallying +27% 🥇 RBL Bank (+14%) hit a 5-month high. Campus Activewear (-12%) hit a new 52-week low. Adani Total Gas (-11%) closed down on a weekly basis for the 4th time in the past 5 weeks. 📉 Check out their charts below: