Fat Prophet's David Lennox shares his views on rising crude prices and outlook for the commodity going forward, in conversation with Alex Mathew and Hiral Dadia #BQLive
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00:00 Good morning and thanks so much for tuning in.
00:02 You are watching Trade Talk on BQ Prime.
00:04 My name is Alex Mathew and with me is Hiral Dharia.
00:06 Good morning, Hiral.
00:07 Good morning, Alex.
00:08 Well, we are looking at the equity markets and we are heading towards the monthly expiry.
00:13 But then the big headline today is not in fact equities, it is crude.
00:18 Because since this morning, since very early this morning, you have seen a big spurt in
00:22 Brent crude price, in fact, crude prices in general.
00:26 And this could be largely on account of the sudden drop in inventories that you have seen
00:31 in the US.
00:32 The Cushing facility in Oklahoma seeing an inventory of 22 million barrels, which is
00:39 in fact the low point since July of 2022.
00:42 Absolutely.
00:43 And with this, the next level that everyone is actually watching out for in terms of crude
00:48 is whether it will actually go to $100 per barrel or not.
00:52 And if it does, what the sustenance will be and what's the impact going to be to emerging
00:58 markets like India as well, because we are net importers, right?
01:02 And we've spoken about Hiral, very interesting, right?
01:04 If you look at our social feed and maybe we'll post it in the comments.
01:08 Just a short while back, I think if I'm not mistaken, yesterday or day before yesterday,
01:12 we talked about crude derivatives and how that flow of price rise in crude feeds into
01:18 the rest of the system.
01:20 We were talking about it hitting in July snow rather in December, in the December quarter
01:24 and the fourth quarter as well.
01:25 Quite a few of these.
01:26 And clearly, so you will see that pressure that continues to build up in terms of paint
01:31 companies in today's session.
01:33 OMCs could see some of the pressure as well in today's session.
01:36 It's going to be interesting to see how these companies react and what's the overall impact.
01:41 But coming back to the markets as well, clearly, Alex, if you see yesterday's session, clearly
01:47 we were on a losing streak, six days losing streak is what we've actually broken.
01:52 19,700 is what we're tracking in terms of Nifty 50 as well.
01:57 And it was mainly RIL that was actually fueling the rally.
02:01 In fact, we were just having a conversation with a couple of analysts with regards to
02:04 RIL, whether it was in the oversold zone.
02:07 And from a fundamental perspective, analysts are of the opinion that yes, RIL has that
02:12 potential to see that 15 to 20 percent up move.
02:16 But it was HDFC that was on the losing end.
02:20 So both these heavyweights are trying to play that balancing act out in terms of Nifty.
02:25 And you have Bank Nifty that continues to underperform as well.
02:28 In fact, if you see in terms of Bank Nifty as well, that underlying trend continues to
02:33 remain weak.
02:34 And overall, the phenomena that we witnessed in yesterday's session was that of short covering
02:39 in the last hour of trade.
02:41 And this was ahead of the F&O expiry, which is slated for today, as well as the RBI policy
02:48 that is next week as well.
02:50 So both of these are keeping the traders pretty much cautious and taking the truncated week
02:55 into consideration, taking the earnings session into consideration as well.
03:00 All of this is something that we will be eyeing pretty closely.
03:04 And that's what will continue to lead to consolidation.
03:07 And clearly, towards the end of the session yesterday, we saw that short covering that
03:13 took place and pushed the Nifty 50 very close to the high point of the day and pushed it
03:17 above that 19,700 mark, kept it there.
03:20 But I think in conversations we've had in the recent past, we've spoken about the fact
03:24 that 19,800 will prove to be that first major barrier for it to cross.
03:29 And 20,000 looks unlikely, at least in the near term.
03:31 And certainly, with crude heading towards that $100 mark, that sentimental negative
03:36 aspect comes into play.
03:37 And people don't really want to take positions in this market.
03:40 They're being cautious because, as we just mentioned, one, you have the earnings season
03:45 starting in the next week or 10 days.
03:47 You have the RBI policy next week.
03:49 Today, you did have expiry as well.
03:51 So they want to cover their positions and stay put.
03:54 Now, we do have a conversation lined up with an expert on crude to kind of give you a sense
04:00 of where things are headed, why there has been such a big spurt.
04:04 But while we wait for him to join in, David Lennox is joining in.
04:07 While we wait for him, let's go and talk about a few of the stocks that you should bear in
04:12 mind and watch out for in trade today.
04:14 ONGC, oh, OK.
04:16 So I'm told that we have, in fact, been joined by David Lennox, Resource Analyst at Fat Profits.
04:23 David, thanks so much for taking the time.
04:24 And I think opportune moment for us to request to speak to you yesterday because we've seen
04:29 a sudden spike in crude oil prices this morning.
04:33 Part of that, I think, has to do with the crude inventories in the US falling.
04:37 But what else is at play?
04:39 Well, look, certainly when you have a look at the crude markets, the big factor that's
04:45 influencing prices has been the fact that OPEC have kept their production levels constant
04:50 over the last few months.
04:52 The cuts that were supposed to be wound back haven't been implemented.
04:57 And that's really what has given the supply side a lot more tension when it comes to the
05:03 pricing.
05:04 When one also looks at the demand side, we've got China now with its small stimulatory programs
05:09 are starting to add up to a fairly decent stimulatory action.
05:15 And with China coming back on stream a little more strongly, that's certainly uplifted demand
05:20 for that country.
05:22 Also inside the US, we would have expected to have seen with the demise of the drive
05:26 season as their winter starts to set in that we would see demand coming off for gasoline.
05:32 We haven't seen that happening yet.
05:34 It's remained quite robust.
05:36 That's reflected in drawdowns of inventories in that country.
05:40 And again, that's put some tension inside the pricing mechanism for crude.
05:45 So overall, yes, we have seen a very good run, but the reasons behind it are quite valid,
05:50 we feel.
05:51 Good morning, David.
05:53 So taking this into consideration, how are you looking at the near-term demand?
05:57 Because taking news from a lot of analysts, they are of the opinion that the near-term
06:02 demand does not look as strong as some of the indicators are actually suggesting, right?
06:09 And if crude moves past the $100 per barrel mark, do you think that move is going to be
06:16 short-lived or it can still go up further?
06:20 Look, certainly on the demand side of things, we do think that, yes, there has been an improvement,
06:26 especially coming out of China.
06:29 That's where we've seen the big pickup in demand starting to swing into the pricing
06:34 mechanism.
06:35 Had China continued to perhaps labor as markets were expecting four or five months ago, then
06:42 we wouldn't have seen such a significant uplift in demand forecast.
06:46 So we do believe that that demand is there and it is growing.
06:50 And certainly you only have to look at what's happening inside the US.
06:54 We've seen inventories falling.
06:56 Now unless somebody's storing inventories up somewhere else, it does mean that there's
07:00 been draws on those inventories.
07:03 And the only way you get those draws is that it's being used.
07:06 So one would suspect that demand looks quite, at this point in time, quite strong.
07:13 And when you throw in, as I've talked about already, the supply side, that's really what
07:17 has given the prices somewhat of an upward trajectory.
07:22 In terms of the continued rise towards $100, we believe that it probably may be able to
07:29 touch $100, but we don't think it will stay there for a significant period of time.
07:35 We're looking at a range for us at between $90 and $95 for WTI and just slightly higher
07:43 than that between $93 and $97 for Brent.
07:48 The reason we're saying that is because if you have a look at OPEC, they really don't
07:53 want to lose the pricing power that they now have over crude oil.
07:58 If you cast your mind back just three or four years, the US was producing about $13 million
08:05 barrels of oil a day and they controlled prices.
08:09 Well, there is nowhere near that amount of production going on inside the US now.
08:14 And of course, OPEC have regained control of prices.
08:18 If the price gets to $100, that's going to start introducing the marginal cost of US
08:25 shale into the picture.
08:27 And we can see that shale coming back on stream over the course of the months ahead.
08:31 OPEC won't want that, so they're quite comfortable to probably keep the oil price, both WTI and
08:37 Brent, somewhere inside the $90 to $100 range.
08:43 Just a last question then, and you've provided us the perfect picture in terms of the range
08:48 that you expect, but in terms of key events to watch, you said that the OPEC+ is not going
08:54 to be very keen on losing control of that pricing.
08:58 So if you gaze into the future and the remainder of this year, what do you anticipate they
09:02 will do with the supply side then, anticipating that winter demand will come into play in
09:08 countries in Europe as well as in China and in the US?
09:12 Look, certainly you've got to remember that OPEC at this point in time, it's all verbal.
09:18 So they can very quickly turn around and say, we will increase production and we will wind
09:25 back those cuts rather than we're going to keep production where it is at the moment.
09:29 And that will have a significant impact.
09:32 They can do that very quickly because they've got the mechanisms that will allow them to
09:38 do that.
09:39 So that's why we haven't really seen the oil price rush away to already reach $100.
09:47 It has been quite a sustained and controllable, we believe, rise in the price.
09:52 So one would suspect that if OPEC come out and change their mind about production cuts
09:59 and roll them back, then watch out.
10:01 We will see that oil price start to move to the downside.
10:05 So that's probably the key indicator.
10:08 Also we are watching obviously what's happening inside China.
10:11 Are those small stimulatory programs that the authorities they're making, are they in
10:17 fact adding up to one fairly big stimulatory program?
10:21 They're watching to make sure that that continues to progress.
10:25 And of course, in the US, you've got to continue watching those inventory drawdowns.
10:30 So overall, there are those three factors that we're watching.
10:33 And at this point in time, the key one is what will OPEC say?
10:37 If they say, yes, we're going to roll back production, then that's going to be increasing
10:44 the price as we've seen.
10:46 If they come out and suggest that they're going to actually up production, then we'll
10:51 see the price move the other way.
10:53 So they're the three key factors that we're really watching out for to see which direction
10:57 the oil price will continue to trend toward.
10:59 Right.
11:00 David, a quick technical one.
11:03 Clearly, if you see the near-term prices, they have risen relative to longer-date contracts
11:09 as well.
11:10 So we are clearly talking about backwardation.
11:11 Similarly, when we had seen a contango effect back then in 2014, '16 and '20, we were,
11:19 I mean, analysts were advising to buy crude at those levels.
11:23 In what situation are we currently taking the way the spot prices are moving as compared
11:29 to the futures?
11:30 Look, certainly, I think, and you've suggested it already, there is still a lot of concern
11:37 around near-term demand.
11:40 So until traders become more confident that they see a better demand picture, then we
11:46 are going to have those anomalies inside the futures prices.
11:50 So that's what creates a market.
11:52 We at this point in time suggest that we should be seeing a more normal pricing process inside
11:58 the futures, and we would be picking up those short-term anomaly prices.
12:03 David, thanks so much for joining us this morning and giving us that perspective, certainly
12:10 timely conversation with you.
12:13 Thank you.
12:14 All right.
12:15 So let's turn attention, as I was saying, to a conversation about the various stocks
12:20 that you have to watch out for in trading.
12:22 Let's start with, in fact, an oil explorer, ONGC.
12:25 A couple of developments to talk about.
12:27 Mika is joining in to give you the latest.
12:29 Mika, good morning.
12:30 Good morning.
12:31 What are you picking up?
12:32 So there are two updates.
12:33 The first one, it's entered an MOU with NTPC Subsidy, NTPC Green Energy to explore the
12:38 feasibility and setting up renewable energies in different domains.
12:42 NTPC's green energy scope business is power generation and involves offshore wind projects,
12:48 green hydrogen, and energy storage technologies.
12:50 The MOU has outlined a partnership between the two firms in such a way that they will
12:55 work together on renewable energy products in India and abroad, particularly focusing
13:00 in offshore wind initiatives.
13:01 Additionally, this will also investigate potential ventures in energy storage, e-mobility, carbon
13:07 and green credits, nuclear energy, green hydrogen, and related products.
13:11 This MOU is in line with ONGC's renewable energy objectives.
13:14 The company aims to have 10 gigawatts of installed renewable energy capacity by 2030 and will
13:19 invest Rs. 1 trillion for the same.
13:22 It also aims to achieve net zero emissions by 2038.
13:25 Currently, the company has 189 megawatts of renewable energy capacity, mainly spread across
13:31 wind and solar, with solar capacity at 36.52 megawatts and wind at 153.
13:39 The company has also entered a crude oil sales agreement with Mangalore refinery and Petrochemicals,
13:44 which is the largest single location PSU refinery in the country.
13:49 The agreement is expected to create synergies and aims to streamline sale and purchase transactions
13:55 for crude.
13:56 It is applicable till March 31, 2024, and the agreement will mainly be related to crude
14:01 oil coming from ONGC's Mumbai high fields, which has an annual capacity of 20 million
14:06 tons.
14:07 In terms of stock performance, ONGC is up 7% this month and 24% year-to-date.
14:12 And according to Bloomberg, the stock has 19 buy calls, 4 sell and 4 hold calls, and
14:20 the 12-month return potential, according to analysts, is 4%.
14:23 So that's ONGC.
14:25 And the impact with regards to crude coming to $97-98 is going to be interesting to watch
14:31 out for in today's session.
14:32 Thanks, Mika, for getting us the details.
14:34 But moving from crude, you have the telecom space that continues to remain in focus, and
14:38 this is on the back of the July data that has come in.
14:41 I think this is the highest monthly additions that telecom companies have seen as well in
14:46 terms of subscribers.
14:48 And Vodafone is going to be interesting because something that's working in their favor is
14:52 their billing cycle notifications that all of us would have got in terms of...
14:56 All of us, no.
14:57 Exactly.
14:58 Some of us probably at least was using Vodafone, right?
14:59 Some of us were still using Vodafone, yeah.
15:02 So in terms of Vodafone, clearly what they've said is, you know, your bill due date, which
15:06 was 15 days earlier after the bill date, has now moved to 10 days.
15:12 Now how is that going to impact from a cash flow perspective and what the data from TIAI
15:17 suggests?
15:18 Rishi is standing by to get us more.
15:20 Good morning, Rishi.
15:21 What do you have for us?
15:22 Good morning.
15:23 So as you said, the total user addition was at over 26 lakhs, and specifically Jio was
15:29 the leader where it added about 39 lakhs and that was the net additions that I mentioned
15:34 overall.
15:35 And then this, it was followed by Baati Airtel where the additions are at 15 lakhs.
15:38 Now for Jio, this is the 17th consecutive month of subscriber additions.
15:43 And if you look at Airtel, it had discontinued its 99 rupee plan in February for 19 circles,
15:49 which may have impacted the company's subscriber base.
15:52 And this is also the fifth consecutive month where Jio has added more subscribers compared
15:57 to Airtel.
15:58 Then we have Vodafone Idea, which has lost about 13 lakh subscribers, which is much more
16:01 than what it lost in June.
16:04 Then we can have a look at the market share where again, Jio is leading over there as
16:08 well, where it has added at about a quarter of a percentage of market share.
16:13 Then there's Airtel again, which has added about 0.06% in market share.
16:17 Vodafone has lost the maximum amount of market share at 0.16%.
16:21 Now Jio's performance on the rural front has also improved where it has added about 2 million
16:25 subscribers, while Bharti Airtel lost about half a million subscribers in the rural space.
16:31 And it continues to have the highest urban to rural mix at 56%.
16:37 Then MK also came out with a report on the telecom data yesterday, where it was specifically
16:43 mentioning that with respect to Jio and Airtel, what is going to be key to look out for is
16:47 the timing of the tariff hikes, because that is something that both the companies are looking
16:51 out for, and they just have to time it perfectly is what MK is saying.
16:56 And with respect to Vodafone Idea, it's really important for the company to raise funds at
17:01 the earliest possible so that it can invest in CapEx and limit the amount of subscriber
17:06 loss.
17:07 Now, as you said, that's changed its billing cycle to 10 days from 15 days, so it will
17:11 improve its working capital and cash flows.
17:12 But clearly it won't be enough for Vodafone Idea to limit the amount of subscriber loss
17:16 that has been happening this year.
17:19 And you know, we're talking about CapEx, but before that, the dues that are pending, that
17:24 need to be cleared as well.
17:25 So CapEx becomes a long term plan for the company.
17:29 But despite all of that, we're still talking about Vodafone Idea controlling a fifth of
17:34 the telecom market in India.
17:35 Of course, it's losing.
17:36 And the stock price performance has been spectacular over the last couple of trading sessions as
17:40 well.
17:41 So there is some bit of conviction, at least in the trader community, probably not in the
17:45 user community so far.
17:47 Also, perhaps because of the ownership structure of Vodafone Idea, because of what has panned
17:51 out over the past several years.
17:54 But thanks so much, Rishi, for bringing us those updates.
17:56 Let's focus in on more stocks that we have to watch out for.
17:59 And among them, there is a significant development and we've been talking about this, Zipla.
18:05 And the latest update, of course, is that the company's promoters could in fact be looking
18:10 to sell state.
18:11 Varsha is joining in to give us more perspective on that and a lot more.
18:13 Varsha, what are you picking up first of all on Zipla?
18:16 So as you rightly said, promoters of Zipla Limited are in advance stocks with two groups
18:21 for the sale of controlling stake, which is valued at approximately US$6-7 billion.
18:25 Now, this is according to media sources.
18:28 Now, the potential buyers include Torrent Pharmaceuticals and Zydus Life Sciences.
18:32 Another group also include BP, EA, EQT and General Atlantic.
18:37 The successful bid by Torrent Pharma would position it as the second largest Indian drug
18:41 maker after Sun Pharma.
18:43 Zipla's promoter group led by founder Yusuf K. Hamid is seeking a valuation of at least
18:48 33,000 crores for its 33.47% stake.
18:51 Now, in the event of change in promoter control, a mandatory open offer would be triggered,
18:57 requiring the buyer to acquire up to 26% from the Zipla shareholder.
19:01 The total amount required for the acquisition could be at least 51,000 crores.
19:05 However, if they acquire a premium to the market price, more than 26% of public shareholders
19:12 may tender their shares, potentially increasing the deal size to US$7 billion.
19:17 Now, one of the members of Zipla's promoter family may retain around 5% of the company
19:24 as a non-promoter shareholding even after the proposed promoter exit.
19:28 The sale is driven by lack of clear success within the Hamid family to lease Zipla as
19:32 indicated by the investment bankers.
19:34 Then next, we have Tata Power.
19:38 Tata Power Renewable Energy Ltd., a subsidiary of Tata Power Company, will set up a 41 MW
19:44 captive solar plant in Tamil Nadu.
19:47 The captive solar plant project will be commissioned 12 months from signing of the Project Development
19:52 Agreement.
19:53 Within this new captive solar plant, the total capacity will expand to 7,877 MW.
19:59 Then we have Dixon Technology, which has entered into a pact with Xiaomi India to manufacture
20:03 smartphones and other related products to the Chinese brand.
20:07 Now, to be sure, this is not the first time that Dixon is partnering with Xiaomi to make
20:11 products.
20:12 The company has been making TVs for the erstwhile market leader since 2018.
20:17 The company also manufactures smartphones for Motorola and Samsung.
20:20 Now, the Dixon subsidiary is one of the few Indian companies who have received incentives
20:24 under PLI and the company has so far received around 110 crores as incentives from the government
20:29 for meeting the incremental targets.
20:32 Then we have NBCC, which is the company to sell 14.75 L sq.ft. commercial build-up space
20:40 for Rs. 5,716 crore.
20:43 This is through e-auction.
20:45 Then we have Vedanta Ltd., which is nearing a deal to sign off businesses into several
20:50 listed entities according to the Bloomberg sources.
20:53 Now, this, if successful, could help Anil Agarwal manage his Metals to Energy Empire's
20:58 debt load.
20:59 Now, the company has informed its lenders of the restructuring and could announce the
21:02 plans in the coming days.
21:05 Businesses including aluminium, oil and gas, and steel will be separately listed.
21:10 Vedanta's parent Vedanta Resources will remain the holding company.
21:14 Deliberations are going and no final decisions on the structure or timing of the demerger
21:18 has been made.
21:19 Now, lastly, we have NCX, which has announced the implementation of a new web-based commodity
21:25 derivatives platform that would interface with members for providing risk management,
21:30 collateral management and settlement-related services.
21:33 Now, the effective date for implementation shall be from October 3.
21:39 In this regard, the Peering Corporation has also planned to conduct a mock session on
21:43 October 2 in order to allow members to connect and participate during the mock session.
21:47 MCX, in fact, on the back of similar news did see some strong moves.
21:52 Tesla will be in focus, Vedanta as well after the Moody's downgrade was under pressure.
21:56 5-6% were the kind of cuts.
21:58 So now probably uptake.
21:59 And Dixon.
22:00 And Dixon has been interesting because Jeffries came out with a note, a Dixon versus an Amber
22:07 and their preference was an Amber.
22:09 And in spite of Jeffries having a preference over on an Amber, Dixon actually hit a 52-week
22:14 high.
22:15 And if you see those last three trading sessions, Dixon has seen gains of almost 10-11%.
22:19 So there is that conviction that continues with regards to Dixon as compared to Amber.
22:24 Let's see where it moves from here.
22:25 Thanks, Parsha, for getting us the details.
22:26 We will be watching out for all of this.
22:27 And NBCC, you know, from the broader markets could see some bit of an up move in today's
22:34 session.
22:35 But moving on, the primary markets are back in action and we have our IPO man back with
22:39 us.
22:40 So, Himansh, tell us what do you have for us?
22:41 We have Yatra, which is listing.
22:44 And you have updates on the other ones.
22:45 Right.
22:46 So Yatra is listing today and we are heading towards the close of the month, which has
22:49 been very happening for the primary markets.
22:51 Well, I'll speak about Yatra online first.
22:53 The shares are going to be listed on exchanges today with the issue price at the upper price
22:57 band of 142 apiece.
22:58 Now, the 775 crore IPO was subscribed over one and a half times on the final day.
23:05 And much of the chatter on the street was around the valuations of the company, which
23:09 is very interesting because it has only one comparable, EasyTrip Planners.
23:13 And the industry PE stood at around 56.
23:16 And people were speculating why is Yatra trading at over and above 200-250.
23:20 Well, since this was partly because of the company recording its first profit of 7 crores
23:26 very recently in the last fiscal, whereas the competitor EasyTrip Planners reported
23:31 earnings of over 134 crores the last fiscal.
23:35 Well, in such cases where companies are emerging out of losses and are in a very high growth
23:43 of an industry, traders and investors tend to look at multiples based on other factors
23:48 such as revenue, growth potential, industry outlook, and so on.
23:51 So perhaps the valuations are warranted in some regard.
23:56 But coming on to the subscription so far, Valiant Laboratories, which opened its bids
24:04 yesterday, has been subscribed 33% on day one.
24:09 The company plans to use the proceeds for its Gujarat facility for specialty chemicals.
24:13 And the bids are so far led by retail investors who are already 60% subscribed.
24:18 JSW Infrastructure, the 2,800-crore IPO, has been subscribed 37.37 times on its final day,
24:26 led by institutional investors who came in at the last day.
24:29 57 times is the kind of subscription we are seeing from them.
24:33 And then we have Updater Services, where the IPO was subscribed almost about three times,
24:38 led by institutional investors.
24:40 I mean, it was worrisome on day one and day two.
24:43 It was off to a slow start, but it has managed to complete its subscription.
24:48 And lastly, we have some performances from Signature Global and Sysilk that listed yesterday.
24:54 Both of them won up almost 19% premium over the IPO price.
24:58 And Sysilk sat about 11% premium to its IPO price.
25:02 So let's see if the momentum in the primary market continues.
25:04 All right.
25:05 Thanks so much, Himansh, for bringing us those updates.
25:08 And that brings us to the end of this edition of Trade Talk.
25:10 We did highlight at the start of this conversation that the big headline heading into trade this
25:15 morning is not necessarily equity markets.
25:18 It is, in fact, the commodity space, and it is crude oil prices.
25:21 So watch that very closely over the course of the day.
25:24 Lots coming up, and it will come right here on BQ Price.
25:27 So stay tuned.
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