Thursday, December 24, 2015

Cos with exposure to West Asia may face the heat

Falling crude oil is a worry for Bajaj Auto, Bharat Forge; IT, pharma too may suffer.

Slide in crude oil prices may be good news for Indian economy as a whole but not for some large companies such as Bajaj Auto, Bharat Forge, L&T and Dr Reddy’s Laboratories from NSE 100 index. These companies are negatively impacted due to sizeable exposure to oil producing region such as West Asiaand North Africa.

Bajaj Auto exported 46 per cent of its total sales volumes and 75 per cent of that is done to Africa, West Asia and South Asia.

Bharat Gianani, analyst at Angel Broking, said Bharat Forge is impacted not only due to exposure from West Asia but also Africa. Gianani said oil and gas sector forms 10-15 per cent of Bharat Forge’s consolidated revenues and business from this industry has been impacted for the last 2-3 years.

Dwindling order book

In first half of FY16, sales outside India grew at half the rate of revenue growth of 9 per cent within India. In FY15, revenues of subsidiaries declined 7 per cent while standalone sales jumped 33.5 per cent.

L&T in September quarter said, West Asia forms 15 per cent of the company’s order book.

For Dr Reddy’s Laboratories, 50 per cent of consolidated revenues come from subsidiaries and Russia forms 12-15 per cent of consolidated revenues.

Analysts said the impact could also be on information technology companies as clients in oil and gas sector have either frozen their budgets or not starting any new projects. Further, pharmaceutical companies having exposure to emerging markets or commodity dependent economies including oil are witnessing pressures as their currencies have depreciated substantially and prices of commodities also have dropped sharply.

Asian Paints, Marico

According to the International Energy Agency, more than 64 per cent of the world oil production in 2012 came from countries such as Russia, Saudi Arabia, US, China, Iran, Canada, UAE, Venezuela, Kuwait and Iraq.

Crude oil prices have fallen close to 40 per cent in 2015 so far.

Companies such as Asian Paints, Marico, Cummins India and Glenmark Pharmaceuticals also have exposure to the region and their global business is already facing pressures.

Kunal Sheth, analyst at Prabhudas Lilladher, said Cummins India expects the domestic business to grow 10-15 per cent and exports to grow by 0-5 per cent (previous 10-15 per cent) as global scenario today is weak and quite a few countries especially commodity linked countries are struggling.

Though international business forms 10-15 per cent of Asian Paints overall revenues, West Asiacontributes 50 per cent of overseas operations.

Marico has exposure to Africa and political tensions in Egypt have already impacted business. MENA region forms 18 per cent of international business, which in turn forms 19 per cent of overall revenues. Effectively, exposure to MENA is 3.4 per cent of consolidated revenues.

Amey Chalke, analyst at Motilal Oswal, said Glenmark Pharmaceuticals gets substantial business from Russia and the company has faced issues in cash inflows of $22-25 million from Venezuela.

FIIs offload

Share prices of companies forming part of Nifty 50 such as Bajaj Auto, L&T and Dr Reddy’s have been under pressure also due to heavy selling by foreign institutional investors. Asian Paints have gained as exposure to West Asiaregion is negated by lower raw material costs due to falling crude prices.

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