Crude benefits

SMARTSHARE

The release of the official April-June GDP numbers said growth was running at 8.9 per cent. It seems to have energised the market.

In addition, the price of crude has stabilised at slightly lower levels with the Iranian crisis easing off into a phase of diplomatic grumbling.

Oil tends to spike in December-January as heating demands build up in the cold Northern winter. But it will certainly make a positive difference to India's Balance of Payments over the next quarter.

There are several interesting macro-economic factors that could have a direct influence on the stock market. Rupee interest rates were hiked to cope with domestic inflation and higher international interest rates. Relatively lower crude prices will help check the inflation but the lagged effect of rate hikes will show up over the next several months.

That could be a good thing at one level since banks are scrambling to meet credit demand as well as maintain SLRs. It could also mean that the rupee strengthens to a point where it has an impact on booming exports.

Another interesting point: Q1, 2005-06 saw real GDP growth at 8.5 per cent "" the Q1, 2006-07 real growth rate of 8.9 per cent is actually the same in nominal terms (13.6 per cent in both quarters). Inflation is officially running lower than it was in 2005-06!

Key sectors like electricity & gas (5.4 per cent in 2006-07 versus 7.4 per cent in 2005-06) and construction (9.5 per cent versus 12.4 per cent in 2005-06) have lower growth rates. There could be a signal of impending slowdown here.

Another factor is oil itself. At current levels of crude pricing and retail price controls, Indian refiners are struggling to survive. They would go into bankruptcy at sustained $70-plus prices. The threat of bankruptcy may actually have forced the GoI to devise a more sensible mechanism.

Unfortunately, the GoI will probably shrug its collective shoulders, heave a sigh of relief and relax until such time as prices spike again. There will be no attempt to find a better mechanism if the Indian crude import basket stays at $55-60.

Should one buy banks? A lot of people think so "" the BankNifty has outperformed in 2006. In the long-term, Indian banks are likely to be good buys because of the likelihood of consolidation and merger.

But the short-term picture is messy. Higher interest rates usually mean lower bottomlines for financial entities and it would be politically difficult for the GoI to allow the efficiency-gaining measures that would allow banks to maintain spreads.

Backdoor partnerships seem to be the only route open now for PSU banks at least. And the removal or easing of FI ownership and voting limits won't come while the Left has a say.

Should one buy refiners on the basis that Q3 (and part of Q2) will be better than expected? I would tend not to. The threat of another spike in crude prices is real. And, it's apparent that the majority owner will pay no attention whatsoever to minority shareholders' needs when it makes decisions on oil-pricing.

However private retailer/refiners such as RIL and Essar Oil may be more attractive in a scenario of lower crude. For them, the government pricing control acts as a ceiling; they cannot sell their products at remunerative prices. If crude drops, their margins get better.

Of the lot, Essar has the worst financials, and hence the best chances of producing good short-term returns.