印度策略：不要忽视盈利影响——这不仅仅是一个宏观事件

India Strategy: Don't ignore the earnings impact - it is not just a Overdependence is risky, and worse when it’s on something beyond one’s control. India’sstruggle to cut crude reliance reflects entrenched corporate realities, not lack of intent. Themacro impact of oil is known, but its earnings flow through is less clear. This report maps Venugopal Garre+65 6326 7643venugopal.garre@bernsteinsg.com Nikhil Arela+91 226 842 1482nikhil.arela@bernsteinsg.com India’s Achilles’ Heel?: India’s best years in economic history have often come with crudeat sustainable levels - below $90 a barrel. Even more starkly, India’s worst years and whenits status as a future superpower has come under severe questioning, have occurred whencrude has surged - be it 1991, 2011-13 or to some extent developing today. Over thethree decades since the 1990s, India has stubbornly held on to its import dependence. Thereliance on imports for its energy needs was at 67% in 2000. It was 75% after the GFC Crude goes beyond macro: Most of the time we see crude being discussed, it is citedmore as a macro variable: one that can shift the Balance of Payments out of India’s favorand ultimately impact the GDP growth. However, crude has a deeper play: OMCs benefitwhen crude is down, so do staples, aviation and chemicals or pharma. On the other hand,crude producing and exploration companies benefit when crude surges. The rupee factortoo comes into play - as its depreciation tends to favor IT companies earning primarily in The Nifty earnings’ math: So what actually happens? We did a complete regression ofquarterly Nifty earnings with quarterly average crude price (~80 periods) and determineda peculiar relationship. Too low values of crude aren’t desirable - the earnings increasesteeply till we reach around $50 of crude. $55-60 is when it all peaks and there’s a gradualdownward slope from there - averaging a rate of ~0.5% earnings decline per $5 increasein crude prices. Somewhat interesting is a slight increase around $80-90 mark, whichcould be due to a late resurgence in energy (~21% EPS contribution in total, bulk of it from Crude does bear a disproportionate impact on India Inc’s earnings - and while it enjoysa relatively wider “sweet spot” of $45-$90, the triple digit values are where it starts todeteriorate rather quickly. This is a stark reminder of the detrimental effects a long war in DETAILS India’s crude oil dependency has only headed northward, and with the tensions between Iran and US/Israel now past a month, itbecomes important to see if crude is just creating an issue with current account and rupee, or is going deeper and hurting evencorporate earnings. And if it is, to what extent. That’s what we dig in this note. NIFTY CONSTITUENTS ARE NOT THE SAME AS ITS EPS CONSTITUENTS Nifty index constituents are fairly well known - financials forms around a third with energy, IT and industrials following at 8-10%.However, things change significantly when we look how Nifty’s earnings are contributed by these sectors. When it comes toearnings, financials takes an overwhelming pie at over 50%, and Energy becomes quite big at 21%. IT retains its 8% weight, THE BOTTOM-UP RATIONALE - WHY NIFTY EARNINGS SHOULD BE PROTECTED IN A LARGE BAND The direct crude linkage in the Nifty index is not very high - this is unless crude starts touching extremes where other factorslike rupee, inflation, remittances and government policies start having an impact. So, if one were to consider a fairly manageable crude range - say $60 to $90 a barrel - we have financials constituting half of the index earnings which should not have muchof an impact - in fact the probability of rate cuts going out the window can even help NIMs stay elevated. Energy in Nifty,interestingly, includes both exploratory and production companies like ONGC (which tend to benefit with rising crude) as wellas OMCs which tend to experience losses as crude goes up. Downstream refiners like Reliance have a mixed effect, since they Apart from that, the next highest weight is IT which tends to gain as crude inches higher given the rupee weakening. The majorproblem then comes to the consumer sectors - which make 6-7% by earnings and Pharma/Cement/Chemicals which aredependent on imports - which make up another 2%. The remaining 10% is by Industrials, Telecom and Utilities - which do takesome hit in the form of logistics costs. So we have almost half the Nifty earnings (Financials) unimpacted, 8-9% (IT) which cansee a slight increase with crude movement from 60 to 90, and the remaining 40% which can see earnings growth declining, All in all, what we expected going into our detailed regression of Nifty earnings and crude prices was a very gradual relationshipwith oil in the 60-90 dollars range, perhaps 3-4% hit to Nifty’s long term EPS growth - which has averaged 10-11%. So you cango from 11% growth to 7% growth when oil inches from $60 to $90 per barrel. This comes out to be around 1% sensitivit