Stocks: It may be time to buy stocks surging on oil’s weakness, but ‘expect returns with a lag’

Amid recessionary concerns, analysts recommend investors start buying into such stocks on a medium to long-term basis as the correction in crude price will ease the cost of manufacturing, improve the volume demand and subsequently increase their gross margins.

Oil prices slid about 2% to a 12-week low in volatile trade on Wednesday, extending Tuesday’s heavy losses. Brent futures for September delivery fell $2.20, or 2.1%, to $100.57 a barrel. US West Texas Intermediate (WTI) crude fell $1.54, or 1.6%, to $97.96

“Investors would be better off investing in companies which are consumers of crude oil when it drops, keeping in mind the fact that the benefits get realised only with a lag, although stock prices would tend to factor the move immediately, as is evident in the upmove seen in some of the stocks on Wednesday,” said S Ranganathan, head of research, .

Out of total raw material costs incurred by paint companies, 50%-60% is crude oil and its derivatives. In the petrochemical industry, crude oil is a significant cost because many key chemical building blocks like aromatics, ethylene, and propylene are directly produced from oil or its derivatives like naphtha and liquefied petroleum gas.

“The decline in crude oil prices not only helps in decreasing current account deficit, lower transportation cost, a decline in inflation but also helps in lowering the cost of production of companies in certain sectors which are hugely dependent on crude oil prices,” said Rajesh Sinha, analyst, Bonanza Portfolio.

“With lower raw material prices, the company has the flexibility to pass on the benefit to the end customer to gain market share.”