This instalment of Five Interesting Stocks looks at the potential impact of the Russia-Ukraine war and global sanctions on five stocks.

• Dr Reddy’s Laboratories: This pharma company hit a new one-year low on Thursday with Russia invading Ukraine. In Q3FY22, Dr Reddy’s got about 13.2% (Rs 710 crore) of its total revenues from Russia and the Commonwealth of Independent States (CIS), including Ukraine.

The company’s revenue from this region may be greatly affected with the tensions, and as sanctions on Russia can disrupt the supply chain. The company’s forex losses may also rise with the rapid depreciation of the Russian Ruble.

Dr Reddy's had posted decent Q3FY22 results but missed Trendlyne’s Forecaster estimates. Dr Reddy’s Q3 net profit rose 14% YoY to Rs 709 crores and the revenues increased by 8% to Rs 5,394 crore. Since the company derives more than half its revenue from the US and India, it has been focusing on expansion in the emerging markets (mainly Russia). Revenue from Russia grew 5% YoY in Q3FY22 to Rs 470 crore (about 9% of the total revenues) on the back of new product launches, favorable forex rate, and increase in prices. In Q3FY22, Russia and Emerging Markets provided the company with growth opportunities in a time of high pricing pressure in the US, where it derives 35% of the total revenues. According to the management, the company is careful in allocating capital across geos and has been reducing the R&D expenditure towards the US markets to focus more on Indian and emerging markets. This Russia-Ukraine crisis comes as a roadblock for the management to carry out its long-term strategy to diversify its geographical revenue mix. 

1. Indraprastha Gas: As the Russia-Ukraine conflict intensified, the stock of this city gas distributor witnessed an over 7% intraday correction in today’s session. On Thursday, crude oil prices shot up to over $103 per barrel, the highest since August 2014. While this works to the advantage of upstream oil and gas companies, downstream companies like IGL could face further heat. Stocks of City Gas Distributors (CGDs) were already under pressure as higher oil prices caused domestic gas prices to be hiked by 62% to $2.9/mmbtu in October 2021. Notably, the government also reduced the domestic gas allocation to CGDs which ultimately drove them to rely on spot gas/imported gas which is pricier. HDFC Securities initially expected gas prices to rise by another 37% to $4/mmbtu in April, 2022. However, the current geopolitical situation could brew fresh uncertainty.  

Indraprastha Gas’ stock corrected over 20% ever since the Delhi Government released a draft EV policy note for cab aggregators on January 18, 2022. Acceleration in transition to EVs would sooner or later impact its sales volumes. Cut to the present, and IGL faces heightened risk of soaring oil prices as it will negatively impact the company's gross margins. Higher gas prices mean higher input costs for IGL. Once the company hikes prices to pass on higher costs, its volume could face downward pressure if the price differential with petrol/diesel reduces. Investors should watch out for IGL’s Q4FY22 performance and the upcoming gas price revisions in April, 2022.

1. Kajaria Ceramics: The stock of this ceramic and vitrified tiles manufacturer fell by 5.6% on Thursday with the sharp rise in crude prices, as Russia-Ukraine fighting intensifies. Rising prices of crude can hurt the company’s margins, playing spoilsport to otherwise steady volume growth. Kajaria's Q3 results were good considering the rise in fuel costs and supply chain bottlenecks. Net profits increased 2.6% YoY to Rs 122 crore, and revenue from operations increased 27.4% YoY to Rs 1,068.2 crore. In order to offset increased input costs, the company hiked prices across tiles product segments.The company aims to achieve 15% CAGR growth in volumes over the next 2-3 years on rising demand from urban India. The company has announced a capex of Rs 250 crore to increase its tile capacity by 17% to 85 MSM (million square meters) by Q1FY23. It further outlined Rs 290 crore capex towards tiles and bath-ware segment.

However, these plans of expansion were made with the expectation that fuel prices would eventually decrease and demand will increase. With the Russia-Ukraine conflict intensifying and geopolitical tensions rising, it is hard to predict how long the ramifications of the conflict and sanctions on Russia will last. One thing is clear, oil and gas prices will shoot up and supply chains will be further disrupted.

1. Kansai Nerolac: This paint maker’s stock hit a 52-week low of Rs 453.4 today, continuing to fall after the company posted weak Q3FY22 results. The stock has been falling after the company’s profit fell 34.7% YoY to Rs 132 crore because of low volume growth and raw material inflation. Although revenues grew 13% YoY to Rs 1,694 crore because of an increase in demand in the decorative segment, low demand from the industrial paints segment hit growth. This is because of reduced demand from the auto sector as it is facing production issues because of the ongoing semiconductor shortage.

High raw material cost and delays in raising product prices hit EBITDA margins of the company, falling 721 bps YoY to 12.4%. A recent price increase will sustain the decorative paints segment. Industrial segment prices however need a further increase to offset the sharp rise in raw material cost. With the ongoing Ukraine-Russia conflict, and most of the raw material for the paint sector being petroleum-based, input costs are set to soar even more. Kansai Nerolac needs to take quick decisions on its pricing techniques to avoid significant margin pressure.  

1. Petronet LNG: This liquified natural gas re-gasifier’s stock hit a new 52-week low on Thursday. The stock fell nearly 7% in trading after Russia announced military operations. Oil and gas prices may rise further as sanctions against Russia are announced.

The company’s Q3FY22 results were good with net profit up 30% YoY to Rs 1,143.5 crore and revenues up 71.9% to Rs 12,597 crore. However, volume growth was down 11.5% YoY at 208 trillion British thermal units. Analysts at Geojit BNP Paribas believe the company’s ramp-up with capacity expansion will bode well for future opportunities that may come in with an increase in demand for natural gas. Analysts at Prabhudas Lilladher expect the Kochi plant’s increased capacity utilization to 30% from 19% in FY23 to help in increasing production.