Decoding India's Export-Import Situation Amid the Russia-Ukraine War

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  • Apr 11, 2022 - Decoding India's Export-Import Situation Amid the Russia-Ukraine War

Decoding India's Export-Import Situation Amid the Russia-Ukraine War

Apr 11, 2022

Decoding Indias Export-Import Situation Amid the Russia-Ukraine War

Inflation is rising again. The Russia-Ukraine conflict has added fuel to the fire.

Rising prices has made it difficult for companies to recover from the aftermath of Covid-19.

The war in Ukraine has disrupted the supply of many essential commodities. In some cases it has pushed their prices to record highs.

In this article, we discuss a few buzzing commodities in light of the was and how they fit within India's import-export equation.

Wheat: The super-important grain

Wheat has been among the buzzing commodities ever since the war between Russia and Ukraine broke out. The price of wheat has soared 21% since.

This is because the Russia and Ukraine together account for 30% of global wheat exports. With these countries at war, the supply has come down.

Many countries that rely on imports are facing the heat. For example, Egypt, which imports nearly 80% of its wheat from Russia and Ukraine, is having a tough time meeting its demand.

However, supply shortages in the international market have turned the fortunes of Indian wheat exporters. India's wheat exports have jumped up by 273.8% by volume year-on-year (YoY). The country exported 7.85 m tonnes this year compared to 2.1 m tonnes last year.

However, the sad part is India's share in global wheat exports is still below 1%.

Why is it so?

You see, wheat is a staple consumed across India. To ensure that even the poorest have access to this essential grain, the Indian government procures and distributes wheat in large quantities. The fixed floor price at which the government procures wheat is called the minimum support price (MSP).

If the open market price is lower than the MSP, farmers prefer to sell their produce to the government instead of selling it to private players. When this happens, there is very little scope for exports as the government buys a majority of the produce.

This is exactly what has happened in the last five years. The MSP has been higher than the open market price as a result of which the government godowns are filled to the brim.

However, things are a little different this year.

Due to soaring wheat prices, the open market price has surpassed the MSP. Farmers are realising higher prices for their produce.

As per some estimates, farmers are getting Rs 2,400-2,500 per quintal, higher than the government's offering of Rs 2,015 per quintal.

One company that is profiting big time from increased wheat exports is ITC.

Of the 7.85 m tonnes exported this year, ITC alone exported 2 m tonnes accounting for about a quarter of the country's total exports. ITC, which sells processed wheat under the "Aashirvad" brand, is the second-largest buyer of wheat after the government.

The government and industry bodies have estimated the wheat exports to reach to 10 m tonnes in fiscal 2023. The company is highly optimistic. It estimates the country's exports to rise threefold to 21 m tonnes in fiscal 2023.

Due to bright earnings prospects, investors have been on a buying spree which explains why the stock price of ITC is up 25%. So, if you have been wondering what's fuelling the rally in ITC, well now you know.

The momentum may continue, so keep a close eye on ITC.

Edible oil

Recently, Nirmala Sitharaman, India's finance minister, said she would have bought all the sunflowers blossoming across the globe if she could foresee the Russia-Ukraine war.

For starters, India is a net importer of sunflower oil. The country imports 2.5 m tonnes of sunflower oil annually. 90% of it comes from Ukraine and Russia.

So, with these two countries waging war against each other, supplies have taken a huge hit. As a result, the price of sunflower oil has shot up significantly, and India is feeling the pinch.

Sunflower oil accounts for 17% of India's total edible oil imports and ranks third on the list. Palm oil tops the list, accounting for 62% of total imports, followed by soyabean oil with 21%.

The problem for India is that other oils too have been on the uprise along with sunflower. India's edible oil imports jumped by 62.5% even though the volumes were constant at 13 m tonnes.

So, it is the rising prices which are causing some pain here.

On asking what the government is doing to be self-sufficient on this front, the FM said the government had launched a national mission to boost domestic production.

With an outlay of Rs 110 bn, the initiative focuses on increasing the availability of palm oil to shave off some of the country's import burden.

Large oil manufacturers such as Marico and Adani Wilmar have a great opportunity at hand for backward integration.

Marico and Adani Wilmar are the dominant players in the Indian edible oil market. While Marico has been a multibagger, Adani Wilmar is a recent debutant that has gathered some steam.

Adani Wilmar's listing coincided with Russia's invasion of Ukraine. The possibility of rising oil prices due to supply shortages strengthened the earnings outlook for the company.

On top of that, the company had a low-cost inventory for 60 days which meant higher margins.

Investors have been hoarding the stock ever since its listing. Therefore, the stock has defied the general market trend and is up 156%.

So, make sure you add these dominant players to your watchlist.

Crude Oil: Lifeline of the Indian Economy

At the onset of the Russia-Ukraine war, western nations condemned Russia. As the war unfolded, many of them imposed sanctions on Russia.

The sanctions led to many countries severing their trade ties with Russia. Consequently, the supply of crude oil dropped significantly.

Russia is among the major exporters of crude oil, with a total production capacity of 6.9 m barrels per day. Undoubtedly, Russia is an influential player in this space.

As Russia struggled to find buyers for its crude oil, India came to its rescue. India went against the current and bought the Russian crude oil. There are two reasons behind such a bold move.

First is the country's energy security. There's no doubt that crude oil is essential to our growing economy as the commodity finds its application across several industries.

The second is a steep discount. As per some reports, India bought the Russian crude at US$ 35, much lower than the market price. Lower crude prices bode well for our economic growth.

India has bought 6 m barrels of Russian crude oil since March 2022, which is half the entire volume bought in 2021.

This move could help oil marketing companies like BPCL, HPCL, IOC, and Reliance Industries in the short term. These companies process crude oil to manufacture value-added products.

Thus, these companies could report a significant uptick in revenue and margins in the upcoming quarter.

So, keep a close eye on their results.

A few companies to watch out for...

The logistics sector is going to benefit big time from increased trade activity.

Container Corporation of India (CONCOR) and Adani Ports stand to be the biggest beneficiaries of increased trade. These companies are worth adding to your watchlist.

Though the companies discussed above may seem quite interesting, you shouldn't invest in them until you are sure of your decision.

Invest in a company only after going through its fundamentals thoroughly.

War or no war, a fundamentally sound company would perform better than its peers. So, don't forget to do your homework.

Happy Investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...

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