IndiGo, Ceat: Which stocks are on analysts' radar as oil falls below $70?

Brent crude price today: Analysts prefer aviation and tyre stocks among the lot, but remain cautious on paints and oil marketing companies

Oil price below $70/barrel: As Brent crude oil price trades below the psychological level of $70 per barrel, analysts are backing certain oil-linked stocks to play the momentum.

They prefer aviation and tyre stocks among the lot, but remain cautious on paints and oil marketing companies.

"Oil prices are down over 20 per cent from their recent peak and bode well for sectors that use oil and its derivatives as their raw material. Among the lot, however, aviation and tyre stocks may benefit the most as the sectors may enjoy robust demand coupled with falling input costs," said G Chokkalingam, founder and head of research at Equinomics Research.

 

Brent crude oil price is trading below the $70 per barrel-mark, its lowest level since December 2021. From its recent peak of $91/bbl, which it hit on April 5, 2024, Brent oil price has tumbled 23.6 per cent till September 10 after the Organization of the Petroleum Exporting Countries (Opec) revised down its demand forecast for the current calendar year and 2025.

On the flipside, various oil-linked stocks have eked out decent gains during the period, ACE Equity data shows.

The biggest beneficiary has been InterGlobe Aviation, the parent company of IndiGo airlines, which has surged 38 per cent between April 5 and September 10. Hindustan Petroleum Corporation Ltd (HPCL) share price, on the other hand, has zoomed 37 per cent, followed by Kamdhenu Ventures (28.5 per cent), Balkrishna Industries (27.9 per cent), and Bharat Petroleum Corporation Ltd (17.18 per cent).

By comparison, the Nifty50 index has rallied 11.23 per cent during the period.

While analysts believe the sentimental rub-off may support up moves in each of the allied sectors, including aviation, paints, tyres, tiles, cement, and oil downstream companies, any improvement in the financials, they added, would be visible only if oil prices hold the current levels for a noticeable period.

Stock winners and losers amid falling oil prices

Analysts unanimously back aviation as the best sector to play the falling crude oil theme as aviation fuel (derived from crude oil) forms a major part of airlines' expenses.

At the end of the April-June quarter (Q1) of the current financial year (FY25), IndiGo's aircraft fuel expenses accounted for 36.7 per cent of its total expenses. For SpiceJet, the same was 11 per cent amid curtailed operations.  

Besides, the sector is seeing robust demand for air travel, giving analysts confidence for long-term gains for airlines. They prefer IndiGo among the listed players.

"Falling crude oil prices are an additional trigger for aviation players, which are seeing long-term fundamental headwinds. For IndiGo, growth in passenger traffic, market share gains, and consistent expansion plans makes us positive on the stock for the long-term," said Siddhartha Khemka, head of retail research at Motilal Oswal Financial Services.

Air passengers (pax) carried by domestic airlines were 92.33 million during January – July 2024, up from 88.19 million during the corresponding period of the previous year.
 

Individually, budget airline IndiGo carried 8.05 million pax in July 2024, increasing its market share to 62 per cent from 60.8 per cent at the end of June 2024.

As for tyre stocks, Khemka expects higher replacement demand to support overall demand for the sector with falling oil prices acting as tailwind for margin expansion. He prefers CEAT and Apollo Tyres.

Meanwhile, the outlook for oil marketing companies (OMCs), which refine crude oil to sell petrol and diesel, may improve if oil prices stay low for at least two quarters, analysts said.

"Crude oil prices have declined in the last few weeks with global economic worries and doubts of Opec+ managing to continue its production cuts. The subdued sentiment, however, is offset by data on the ground where oil inventories are below historical averages. While our core thesis remains around a slightly tighter market for oil versus current trends, we expect margin benefits for Indian players only if the current softness sustains for, at least, six months," said ICICI Securities in a note.

Outlook for paint stocks, too, would improve only if there is a demand revival in the festive season amid reduced pricing pressure, analysts noted.