Jefferies calls the conflict between Israel and Iran a buying opportunity; Hormuz warns: there is a risk of major shocks for India

Amid the sharp selloff triggered by US and Israeli missile strikes on Iran, global brokerage firm Jefferies has struck a cautiously optimistic tone, suggesting the revival in the Middle East could be short-lived. The brokerage draws parallels with recent regional conflicts that quickly faded and sees a potential buying opportunity emerging from the panic.However, it warned that any prolonged escalation, especially if accompanied by a sharp spike in energy prices, would pose a significant macroeconomic risk.

India’s economic ties with the Middle East are strong, with the region accounting for 17% of India’s exports and supplying 55% of its crude oil and 38% of workers’ remittances.India’s direct exposure to Iran remains limited; However, the broader risk from the ongoing conflict stems from a possible freeze in trade and travel with the Middle East. The region is a major trading partner, accounting for almost a fifth of India’s merchandise exports, comparable to the US and EU, and also supplies the majority of India’s crude oil needs. Moreover, the Middle East is home to a large Indian diaspora, with worker remittances worth $45 billion in FY24, or nearly two-fifths of India’s total remittance inflows.

The duration of any closure of the Strait of Hormuz will be critical, Jefferies said in a March 1 report. Global shipping companies are currently avoiding the Strait as a result of US advisories. The base case is that the blockade will be short-lived, given its potential impact on global energy prices. The Strait accounts for approximately 20% of global crude oil and LNG consumption.

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Kuwait, Qatar and Bahrain rely solely on the Strait for their exports, while 60% of Saudi crude oil exports and most of Iranian exports pass through it. Initial estimates show that 10 to 13 million barrels per day of crude oil exports, roughly 10% to 13% of global demand, could be affected, along with about 15% of global LNG supply. India receives 2.5 to 2.7 mbpd, or 50% to 60% of its crude oil, and almost 50% of its LNG imports through the Strait. Crude oil and LNG prices are expected to rise sharply in the near term, although the blockage is expected to be short-lived and shipping activities will resume soon. Higher LNG prices could increase feedstock costs for city gas distribution companies such as IGL, MGL and Gujarat Gas and impact volumes for GAIL.

From a macro perspective, the size and duration of the crude oil spike following the Hormuz disruption will be critical. A prolonged shutdown and continued high crude oil prices would be negative. Each $10 per barrel increase in oil prices is estimated to have an impact of 35 basis points on the current account deficit. Retail prices for auto fuels in India have remained unchanged for about 2.5 years, with fluctuating marketing margins of oil marketing companies absorbing price shocks. If crude oil remains above $80 per barrel, increases in retail prices and/or a reduction in fuel taxes could follow. A $10 per barrel increase could have an impact of 20 to 25 basis points on CPI inflation if it is passed on to consumers, or on the budget deficit if the government decides to cut taxes.

The disruption of travel and tourism is a major concern. Middle East tensions and airspace restrictions could immediately dampen international travel demand, impacting IndiGo, where the Middle East accounts for 35% to 40% of its international capacity mix and 10% to 12% of total capacity, as well as airport operators such as GMR and online travel agencies. Hotels may witness a decline in the number of foreign tourists. The spike in crude oil would further pressure IndiGo’s margins due to higher fuel costs for aircraft turbines.

On the other hand, the defense could emerge as a beneficiary. Defense spending is expected to grow 18% YoY in FY26E, compared to a 10-year CAGR of 6% to 8%, while similar growth is projected for FY27. Continued global geopolitical tensions could support the continuation of double-digit growth in the medium term. Indian defense investment remains well below the previous peak of 1.0% at 0.6% of GDP, while the focus on domestic production is expected to remain. The outlook for BEL, Data Patterns and HAL remains positive.

Several companies also have significant exposure to the Middle East. L&T generates over 25% of its consolidated turnover and over 40% of its EPC order book from the region, while Newgen generates around 30% of its turnover there. Other companies with meaningful exposure of 5% to 10% include consumer names such as Dabur and Titan, select pharmaceutical companies such as Ajanta Pharma, Biocon and Cipla, major hospital chains that generate 8% to 10% of revenue from international patients, and other players such as PB Fintech and Voltas.

(Disclaimer: Recommendations, suggestions, views and opinions expressed by the experts are their own. These do not represent the views of The Economic Times.)