Explained: Why Nifty firms are better insulated from oil shock than small, midcaps

Suppliers of energy in the Nifty basket such as Coal India Ltd, NTPC Ltd, Power Grid, ONGC and Reliance Industries Ltd are positively impacted by the ongoing West Asia war, as they belong to sectors such as coal, electricity and upstream oil companies. The negatively impacted oil marketing companies (OMCs) and gas companies are outside of Nifty and are largely spread across the small and midcap space, ICICI Securities said in a fresh strategy note.

The brokerage noted that services sector within the 50-pack Nifty, including IT, banks, insurance and other financial services, does not have any meaningful reliance on oil and gas as a source of energy and makes up close to 47 per cent of the index weight.

“Market leading companies possess the highest franchise value within their areas of operation. Consequently, they have the pricing power to pass on costs as well as consolidate market share, while smaller players are likely to be more severely impacted,” the brokerage said.

ICICI Securities said the significantly impacted industrials are largely spread across SMID space and are absent from Nifty index. This made the brokerage believe Nifty is better insulated from oil shock than SMIDs.

ICICI Securities said major energy-consuming industrials within Nifty are concentrated in coal, electricity and oil and gas. It said metal companies from Nifty are largely reliant on coal as a primary source of energy. In the case of telecom, only 20 per cent of power and fuel consumption is contributed by diesel. In the case of cement, energy sources are spread equally between coal and petcoke, followed by diesel.

Impacted sectors included infra and capital goods. Within infra, Larsen & Toubro uses heavy usage of diesel as an energy source. Additionally, there is a potential impact on order inflows from West Asia, ICICI Securities said.

The brokerage said LPG is a requirement for welding and brazing for capital goods players. It also plays an important role in the manufacturing of components. In the case of ports (Adani Ports), volumes could be impacted, as crude oil contributes 30 per cent of total ports volume.

While the consumption sector growth may also be impacted, Nifty constituents with strong franchisee value may pass on costs and consolidate market share, ICICI Securities said. Within consumer goods, beauty, personal care and home care are the most vulnerable given their high reliance on crude-linked input.

“We believe that, so far, the Gulf conflict is a supply shock while demand remains intact; therefore, prices could rise and companies highly dependent on oil and gas inputs may be impacted the most. From a supply perspective, demand for coal and electricity will likely rise, alongside higher realisations for upstream oil companies,” ICICI Securities said.