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War Profits
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War Profits: 4 Companies to Watch Out For

Apr 18, 2022

War Profits: 4 Companies to Watch Out For

War is never a pleasant reality for anybody. War results in high inflation which dents the economic growth of a country.

Markets, in particular, despise war and reacts sharply to it as businesses aren't usual anymore.

Market's reaction aggravates if there's an influential nation engaged in the war.

For example, Russia is an influential power involved in the ongoing tussle between Russia and Ukraine.

Markets reacted sharply as the Russia-Ukraine conflict came to light.

This is because markets feared of the impact that sanctions (imposed on Russia ) may have had on global supplies.

The fear came true as supplies of several commodities got disrupted resulting in higher prices.

Several companies would suffer due to high input cost inflation. However, there are some that may benefit from rising prices.

In this article we share with you the 4 companies that may benefit from the ongoing war.

#1 Tata Steel

Russia is the 5th largest steel producer, while Ukraine ranks 14th globally. Both these countries together account for 20% of the global steel supply.

Now, with these two at war, supply has gone haywire. Consequently, steel has been trading up 8% ever since the war has begun.

Now, you might say...

Could an 8% jump have a significant impact on the industry?

The simple answer is yes, but the impact will be marginal.

The Russia-Ukraine conflict is only one event contributing to the rising prices. Many forces are tweaking the supply-demand equation, thereby driving the prices up.

For example, China's imposition of higher tariffs on steel exports made steel expensive.

Also, the demand has been quite robust after easing of restrictions that had been imposed to curb the pandemic.

India, the second-largest steel producer, will inevitably benefit from higher prices.

Therefore, now is the time for investors to keep a close eye on top steel manufacturers.

One company that may give others a run for their money is Tata Steel.

Tata Steel is amongst the largest steel manufacturers globally, with an annual production capacity of 34 m tonnes. It has a sizable operational presence in India, the UK, Singapore, Thailand, and Vietnam.

Apart from benefitting from the sector-wide tailwinds, the company is restructuring its balance sheet.

It is shedding off its unproductive assets while reducing its debt simultaneously.

The company has reported robust growth numbers for the last few quarters. Capital allocation has also improved under the able guidance of Tata Sons chairman N Chandrasekharan.

Investors have taken note of its efforts which is why the stock is up by 83% in the last one year.

For more details, check out Tata Steel's factsheet and its quarterly results.

#2 Dr. Reddy's Lab

You may wonder how pharma companies would benefit from the ongoing war.

Well, for starters, many western nations have imposed sanctions on Russia. As a result, many pharma companies are withdrawing from Russia, leaving Russia scrambling for other sources.

On asking who would fill in the void left behind by these pharma companies, Russia's ambassador to India said that Indian pharma companies may replace the western manufacturers.

If this comes through, Indian companies having a sizable operational presence in Russia will benefit big time.

One company that could cash in on this opportunity is Dr. Reddy's Laboratories.

Dr. Reddy's is a leading multinational pharma company headquartered in Hyderabad, Telangana.

The company manufactures generic formulations, APIs, and biosimilars. Besides these products, the company also provides manufacturing services to other pharma companies.

Though the company doesn't have any manufacturing plant in Russia, it has had a presence in the region for over three decades. Revenue from Russia accounts for about 8-10% of the company's total revenue.

Dr. Reddy's credibility with the Russian authorities is well known. Being the sole distributor of the Sputnik V vaccine is proof of its credibility amongst the Russian authorities.

Dr.Reddy's was in a downtrend until the war broke out. Since then, the stock has been up 12%. The market has noted the opportunity that is there for the company. It's time that you do so.

For more details, check the company's factsheet and quarterly results.

#3 Indian Oil Corporation (IOC)

India is the second-largest consumer of crude oil. The country is quite sensitive to price swings.

Every time oil prices shoot up by $10 per barrel, the inflation goes up by roughly about 50-55 basis points. Thus, higher oil prices are a drag on our growing economy. Therefore, the country is always on the hunt for cheap oil.

Russia, one of the countries involved in the war, is among the largest crude oil producers globally.

Aligning with sanction imposed on Russia, many countries stayed away from Russian crude. As a result, Russia had a hard time selling its crude reserves.

Consequently, the country tendered its crude at a steep discount to the market price.

Spotting an opportunity and defying sanctions, India bought 6 m barrels from Russia.

Of the 6 m barrels, Indian Oil Corporation (IOC) alone bought 3 m barrels.

As per some reports, the company purchased the Russian crude at a discount of $20-25 per barrel.

This discount may translate into higher margins for the company.

IOC is India's largest oil refining company, accounting for 35% of the nation's total refining capacity.

The company manufactures petroleum products by refining crude oil and has a 50% market share in petroleum products.

It is the most profitable government-owned entity, with a net profit of $6.1 bn for the financial year 2020-21.

For more details, check out IOC's financial factsheet and quarterly results.

#4 Gas Authority of India Limited (GAIL)

Gas prices in India have shot up by 64.7% ever since the war between Russia and Ukraine broke out.

Russia is the second-largest producer of natural gas globally. It is also the world's largest pipeline gas exporter. Europe alone accounts for 41% of Russia's total gas exports. Now, that tells you how important Russia is when it comes natural gas.

So, Russia could cause serious damage if it decides to tighten its gas tap in retaliation to sanctions imposed by the western nations.

The market has been factoring in this fear which is why international gas prices are trading at 14 year high.

As far as India is concerned, the price of the locally produced gas is linked to a formula tied to global benchmarks. These include the Henry Hub of the US, Canada's Alberta gas, and Russian gas.

With gas prices soaring high, GAIL could take home handsome profits.

GAIL is a government-owned producer of natural gas and a leading supplier of piped natural gas with a market share of about 70%. The company owns and operates a network of 13,340 km of natural gas running across the country.

GAIL is a Maharatna, a coveted status enjoyed by only ten other central public sector enterprises.

For more details, check out the company's factsheet and quarterly results.

Closing remarks...

Besides the companies mentioned above, there are others that deserve a mention. Rajesh Exports, Adani Wilmar and ITC are some of the stocks that may benefit from the higher commodity prices. Investors must keep this stocks on their watchlist.

It is certain that some companies may benefit from the Russia-Ukraine conflict. However, do not let yourself fooled by short term profits and invest in them right away.

What would happen if Russia and Ukraine decide to end the war mutually and everything comes back to normal? Well, in that case, stocks that were surging would come crashing down as the event from which they would have benefitted ends abruptly.

Therefore, it's important for investor to assess the fundamentals thoroughly. An intelligent investor always look for companies with sustainable competitive advantages rather than one that may profit from one off event.

So, you need to do two things before you invest in any company. First, assess the fundamentals. Second, see if the company has anything unique which helps it earn profits consistently irrespective of the external circumstances.

If any company pass these checks, you know its a worthy investment.

Happy investing!

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

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