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Stocks negatively impacted by Russia-Ukraine war

ICICI Securities 25 Feb 2022

Auto sector

From an auto sector perspective, supply chain disruptions as well as higher commodity costs (crude derivatives, metals) is of prime concern from ongoing geopolitical tensions. With steep price hikes undertaken in the recent past, any further input costs led price hike can potentially disrupt the demand environment.

Tata Motors: It derives ~78% of sales from its premium luxury car subsidiary i.e. Jaguar Land Rover (JLR), which has all its manufacturing bases in Europe. Hence, any disruptions and price increase in the power and fuel costs will have a negative impact on its operating margins. Moreover, JLR derives ~40% sales from the European region. Hence, any geo-political ramifications could also impact the sales volume.

Apollo Tyres: The company derives ~33% of sales from the European region with manufacturing facility based out of Europe. Hence, higher energy prices (power & fuel) coupled with higher crude derivative prices (carbon black, synthetic rubber – as key raw material) would have an adverse impact on its margins in the near term.

Mahindra CIE: The company derives ~49% of sales from the European region, with manufacturing set-up based in Europe. They have been vocal on higher energy costs, which is expected to impact tis profitability in the near term.

Tiles sector

Tiles manufacturers will be impacted by higher gas prices amid Russia/Ukraine feud.

Somany Ceramics: Somany Ceramics will be impacted sharply owing to higher gas prices (power and fuel cost ranges at 25-30% of sales) as all its plants be it north (linked to three month crude average) or west/south (at spot) are likely to witness a sharp rise in gas prices. The company has already undertaken 14-15% price hike in last three quarters. A further price hike, therefore, could impact demand in the near term.

Kajaria: The impact will be relatively lower than Somany in the near term as its northern plants have long term contracts, which give it a few quarters breather before the contract comes up for renewal. However, its Morbi based plants will be impacted as it is spot linked.

Pharma sector

Dr Reddy’s: Russia CIS accounts for 13% of overall revenues for DRL (| 2672 crore out of | 21257 crore). The company has hedged ~25% of the of the 12 months expected cash-flows at Ruble / INR 0.99 (current rate 0.91). Further currency devaluation due to expected sanctions on Russia could increase currency translation risk.

Besides DRL we do not expect any significant risk for any other players as the exposure to the Russia / CIS region is limited. Similarly, Russia is not the major source of raw materials for Indian pharma companies. That said, some negative impact due to high crude oil prices is possible.

Oil & Gas sector

Gujarat Gas :Industrial PNG constitutes more than 70% sales volume of Gujarat Gas. With the sharp increase in spot gas prices due to Russia-Ukraine war, the company will have to buy costlier LNG, which may have a negative impact on the margins as well as volumes.

FMCG sector

The Russia and Ukraine conflict is expected to disrupt the supply of sunflower oil given 90% of the world’s sunflower oil export is contributed by these two countries(Ukraine :70%, Russia :20%). The increase in sunflower oil prices would warrant price hikes by edible oil manufacturer. Moreover, it could result in shift from the sunflower oil consumption to other edible oils. The edible oil manufacturers are also looking for alternate sourcing geographies like Argentina.  Similarly,  some countries like Turkey are heavily dependent on Russia for their energy (natural gas) requirement. The disruption in Turkey could adversely impact Dabur’s manufacturing operations in the country. Turkey contributes 3.5% to sales for Dabur. Also, incessant increase in crude prices would continue to negatively impact gross margins of FMCG companies, which, in turn, is negative for already beleaguered demand conditions.

Metals sector

The recent Ukraine Russia conflict has given further legs to the ongoing base metal prices rally, especially aluminium. Russia accounts for ~6% of global primary aluminium production and is also one of major exporters of aluminium. On the back of the recent conflicts, there is a fear that there would be supply disruption from Russia, which has led to an uptick in global aluminium prices. In the current calendar year itself (from January 1- February 23, 2022), aluminium price has seen a healthy increase of ~18% and is currently hovering ~US$3400/tonne on the LME, which is a 13-year high. As aluminium is a deficit commodity, any supply constraint results in strong support for prices. During CY21, aluminium deficit was at ~1.1 million tonnes (MT), which is further expected to expand to ~1.4 MT in CY22E.

The US is also reliant on Russia supplied aluminium, which accounts for nearly ~10% of total US aluminium imports. While currently the US has no intention of levying sanctions that would hit Russian aluminium, there is increased level of anxiety on account of the ongoing tensions.

Russia also accounts for ~4% of world global steel production and is also one of the major exporters of steel globally.  Any supply constraint from Russia is likely to support global steel prices.

Chemicals sector

Tata Chemical: Any escalation of geopolitical events between Russia and Ukraine can have an impact on gas prices. Since Tata Chemical’s Europe unit has been producing soda ash through gas, a substantial rise in the input cost can impede margins. However, since the company hedges its input cost, we expect the impact to be minimal. Moreover, the company negotiated contract with a clause of surge in input price beyond a certain point will be passed on completely. Thus, the impact should be less. Europe business constitutes ~15% of overall revenues for Tata Chemical.

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