Breaking news “Petrol prices are going to increase from tomorrow”. This breaking news doesn’t sound breaking enough now a day. It’s a routine announcement for common man in India and he has convinced himself for this shocker every three to four months. Once the news is in media he shrugs his shoulders, cribs about government policies, recalculates his fuel budget in mind and starts cribbing again because of his helplessness. But the question is “Are we so helpless”. I agree that as a common investor we don’t have any control on Government Policies, but we still have our investment acumen. As a smart investor we can device some smart solution to this recurring problem. Without going into the details of Government Policy and discussing if there should be a price hike or not, let’s accept it for the time being that fuel prices are bound to increase in future. So as we have accepted it as a necessary evil, in this article we will explore some creative short term and long term responses as stock market investor which will help us in fighting this evil.
Common Sense
If you trust in economics as a subject then be sure that fuel price hike normally enhances the pace of economic growth and increases efficiency in whole system. It’s never an obstacle in the path of economic growth. If we apply our common sense, it’s not hard to understand that petrol and diesel are scarce resources and with increasing demand prices are bound to increase. Another point is, somebody is there who is paying the price for subsidized fuel prices and if you delve deeper you will be surprised to know, it’s none other than you who is bearing the cost. Now you are aware of the reality so let’ try to find out, what is the impact of fuel price hike on various companies in different sectors and how to benefit from this knowledge?
Sector Impacts of fuel price hike
Oil Marketing Companies
Who gets to en cash the price hike? It’s none other than OMC’s like IOC, BPCL, HPCL, who are the direct beneficiary of the hike. The so called bad news for general public is excellent news for these companies in short to medium term.
Banking and Automobile Companies
As fuel price hike news is a dampener for vehicle buyers (specially four wheelers), in short run there is a decrease in the demand of luxurious and fuel inefficient vehicles. This decrease in demand in turn reduces the loan growth of banking sector.
Alternative Fuel companies
A company which produces alternative fuel sources like Indraprastha Gas Limited becomes hot favorites in such times. It’s clear that conventional fuel prices are bound to increase in future; alternative fuel generating companies are going to be the winners in long run.
Cement, Steel companies
The sectors which are heavily dependent on transportation are negatively impacted in short term especially in rainy seasons as they are not able to pass on the additional cost to the customers because of reduction in demand.
Stock investment Tips
As we have clearly understood the impact of price hike on some of the sectors, let’s define the rules of stock picking so that we are able to generate profit in short and long term. General strategies to be followed are:
1. Just at the outbreak of the news buy into good oil marketing companies. Historically speaking, there is practically nil probability of losing money in short to medium term if you follow this strategy.
2. Once the news settles you can buy into good banking and auto stocks as they will be available at attractive prices due to knee jerk reaction. Hold them for short to medium term for desired returns.
3. Investment in companies producing alternative fuels is a high paying long term strategy. One of the best examples is IGL which I have mentioned above. So if you are a long term investor you should include such companies in your portfolio.
4. For cement and steel companies, you can follow the same strategy which is described in point two above. Once the news settles and companies are able to pass their cost to consumer by increasing product prices, stock value will adjust upwards in medium term.
Conclusion
Feeling of helplessness is just a feeling if you are smart investor. There are hidden opportunities in both bad news and good news. If you know the art you can paint the picture even in times of turmoil. So enjoy the price hike.
What are IPO’s?
If you trust in economics as subject then be sure that fuel price hike normally enhances the pace of economic growth and increases efficiency in whole system
What happens at the background when there is a price increase?
There are many possible responses to rising fuel price but the most noticeable once are:
1. Reduction in long term fuel consumption – People start opting for smaller and fuel efficient vehicles. Emphasis shifts towards using alternative fuels.
2. Increase in fuel efficiency – Auto companies tries to increase fuel efficiency of the engines using technology.
3. Decrease in travel kilometers – People do careful planning for travel as it’s a costly affair now.
About Author
The author Bimlesh Singh is a CFA Level 2 candidate currently working as a business analyst in financial domain. He holds a Bachelor’s degree from IT-BHU. He can be reached at bimleshs@gmail.com.