Motilal Oswal's Top Stock Picks Amid Volatile Commodity Markets

The most important factor to watch for India following the global turmoil after Russia's invasion of Ukraine is crude oil, according to Gautam Duggad of Motilal Oswal Financial Services Ltd.

Oil prices have spiked since the Ukraine crisis broke out and the U.S. and its allies imposed sanctions on Russia. And the crude has surged by $35-40 a barrel from $80-85 a few months ago, Duggad said in an interview with BloombergQuint's Niraj Shah.

Impact Of Rising Crude And Commodity Prices

According to Duggad, more than 50% of the Nifty index companies are insulated from commodity prices. He doesn't expect any impact from higher crude and commodity prices on financials and information technology companies, while metals, and oil and gas firms may benefit in the near term, he said.

A third of the index may see an impact of soaring commodity prices, including consumer durables, automobiles, and, to an extent, telecom and pharma companies, said Duggad.

"But, the real problem lies outside of the Nifty. The pricing power (for companies) is low, the input cost impact is much higher."

The Winners: Paint, Metals, Oil And Gas

He advises long-term investors to opt for stocks of paint companies when crude prices go up. This strategy "has worked for 15-20 years", he said.

Duggad is upbeat on Asian Paints Ltd. as it has pricing power and "exercises it when needed". Its volume growth has not suffered despite the recent price hike, he said.

Duggad expects the metals sector to continue to deliver earnings growth for FY23 and maybe FY24 on high commodity prices. "We've seen a 10x increase in profitability from the bottom in the last two years. In this quarter, we have seen a 45-46% growth in metal profits. So on an absolute basis, the numbers are very strong," Duggad said.

Over the last two years, some of the metal companies have seen rising cash flows, though capex has not "been as buoyant". "The companies have gone ahead and deleveraged their balance sheet substantially."

Oil and gas companies have traditionally benefitted from such high prices and may continue to do so, he added.

The Losers: Cement, Auto

The cement, auto and auto ancillary sectors will suffer as rising commodity and crude prices, combined with higher input costs, will hurt margins and earnings growth, said Duggad.

'We've cut our earnings estimate by about 18% for cement for FY23 and roughly 10-12% for FY24, because coal and petcoke prices have shot up, and crude oil prices [are up] as well. The same effect will be reflected with a lag in freight and logistics prices."

He expects auto and auto ancillary companies—already struggling from a semi-conductor shortage, high input costs, and the push for EVs—to see a rise in company costs.

Specialty Chemical Story Is 'Still Too Expensive'

Motilal Oswal Financial Services had initiated coverage on specialty chemicals sector in June 2021. From June to October, stock prices were up 30-40% and the valuations kept getting inflated, said Duggad.

In the September and December quarters, gross margins collapsed by about 600 to 700 basis points, he said.

Duggad expects a further decline in the January to March quarter as the prices get adjusted to the underlying realities and fundamentals. "But they're still expensive."

Duggad cautions that most of these sectoral bets are not "structural compounding stories". Investors need to be "nimble-footed" and remain vigilant about changes in commodity and crude prices.

Watch the full conversation here: