The ongoing conflict between Russia and Ukraine has hit the global economy and the stock market like a hammer and India has not been immune to it. The benchmark BSE Sensex is down 2.7 percent since last Tuesday while the broader BSE 500 index is down 1.7 percent during the period. The Russian invasion of Ukraine started on the morning of February 24.
The ongoing conflict and the American and the European Union economic and financial sanctions on Russia have led to a spike in prices of energy, industrial and agricultural commodities. The Brent crude oil that is used for pricing India’s crude basket reached US$ 112 on Wednesday, up 16 percent since the beginning of the Russian military operation in Ukraine.
Similarly, the London Metal Exchange Index (LMEX) that tracks the price of six major industrial base metals such as copper, aluminium, zinc, nickel, tin and lead was up 2.25 percent on Wednesday and climbed to an all-time high of 4965.
There has been an even bigger rise in the prices of coal, natural gas, wheat and edible oil. A global rally in commodities is not surprising given that Russia and Ukraine are among the world’s top producers and exporters of crude oil, natural gas, steel, aluminium, coal, nickel, wheat and sunflower among other commodities.
The sharp rise in commodity prices is expected to hurt the Indian economy and corporate earnings.
The rise in prices will result in a higher current account deficit, currency depreciation and higher inflation. This will hurt the economic growth and there will be a decline in corporate margins and profitability in the forthcoming quarters. Not surprisingly the broader equity market is on a downward trajectory since the conflict broke out last Wednesday.
However, it’s not all gloom and doom for the equity investors in the current environment.
While two-thirds of the stocks in the BSE500 index have seen a decline in the last week, the remaining one-third of the stocks have either gained during the week or didn’t see a decline in their share price.
These are largely from commodity and energy producers and are expected to gain from the recent spike in commodity prices.
1. Coal India is at the top of the list with gains of 16.6 percent in the last one week. The country’s largest coal producer is expected to gain from the surge in coal price due to the conflict. It also remains attractively priced with a price to earnings multiple (P/E) of 7.5X and price to book value ratio (P/BV) of 2.8X, both lower than that of the Sensex. Its dividend yield of 8.7 percent is among the highest among the large-cap stocks.
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2. Next is aluminium and copper producer Hindalco. The stock is up 15.6 percent in the last week in line with the global rally in base metals. The stock however remains attractive with a P/E of 12X and P/BV of 1.9X. However, its dividend yield of 0.5X is half that of Sensex.
3. Chemical maker Advanced Enzyme Technologies is a surprise entrant with 15.5 percent gains in its share price in the last week. The company is expected to gain from a disruption in global trade due to the conflict but it remains an expensive stock with a P/E of 28.4X and P/BV of 3.5X, both higher than that of the Sensex.
4. The country’s top steelmaker Tata Steel is next with a 13.1 percent rise in its share price. The company’s Indian and European business is expected to gain from a rise in steel prices and a decline in steel exports from Russia and Ukraine. The stock remains cheap with a P/E of 4.2X and a P/BV of 1.7X. Its dividend yield of 1.9X is also on the higher side
5. Sponge iron maker Tata Metaliks is next with a 12.4 percent rally in its share price. The company is expected to gain from the operational difficulty of many of its gas-based competitors due to a sharp rise in natural gas prices following the conflict. The stock valuation remains attractive with a P/E of 10.1X and P/BV of 1.8X.
6. The country’s top zinc and silver producer Hindustan Zinc is next on the list with a 12.3 percent rise in share price since the outbreak of hostilities. Analysts are expecting record profits from the company due to a surge in zinc and silver prices. However, it’s one of the most expensive metal stocks with a P/E of 16X and P/BV of 4.1X. On the bright side, it offers a dividend yield of 6X, the highest among its peers.
7. The public sector oil and gas producer Oil India is next on our list as it has gained 11 percent in the period. However, despite the rally, its valuation remains attractive with a P/E of 8.4X and P/BV of 0.9X. Its dividend yield of 2 percent is also on the higher side.
8. The public sector gas major Gail (India) comes next with a 10.3 percent rise in its share price. Analysts expect a sharp rise in the company’s profits in forthcoming quarters due to a surge in global prices of natural gas and petrochemicals products. The stock however remains a value buy with a P/E of 6X and P/BV of 1.1X.
9. Pune-based fertiliser and chemical maker Deepak Fertiliser & Petrochemicals has been another top gainer with a 10.2 percent rise in its share price in the last week. Analysts expect the company to gain from a decline in fertiliser and petchem exports from Russia and a global surge in the prices of bulk chemicals and fertilisers due to the conflict. The stock remains attractively valued with a P/E of 14X and P/BV of 2.1X but its dividend yield of 1 percent is on the lower side.
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10. Public sector National Aluminium Company (NALCO) is tenth on our list with an 8.4 percent rise in its share price in the last one week in line with a global rally in metal prices. But the stock still remains attractively valued with a P/E of 8X and P/BV of 2X. The stock also offers a dividend yield of 2.8X, among the highest in the metal space.
(Advice: This article is for information purpose only. Readers are advised to consult a certified financial advisor before making investment in any of the funds or securities mentioned above.)
(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).