scorecardIndia Inc might see margin squeeze with a crude shock at hand
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India Inc might see margin squeeze with a crude shock at hand

India Inc might see margin squeeze with a crude shock at hand
Business4 min read
Source: Pixabay
  • The price of crude has rallied by 30% since June this year as oil producing nations cut production.
  • This rise affects many sectors like oil marketing companies, airlines, paints and more.
  • Only a few of these sectors are able to pass on the raw material rises to consumers as sales remained muted in the first quarter.
In the first quarter of the current financial year (FY24), India Inc’s earnings saw a dichotomous growth with sharp rise in profits over muted sales growth. While sales are yet to see any meaningful pick up since, the raw material effect might go away due to a sharp rise in crude oil prices.

Since the start of September, Brent crude has risen from $85 per barrel to $92 a barrel approximately and this will play negatively for the operations of most sectors.

“Oil prices have rallied more than 30% since late June as the OPEC+ kingpins Saudi Arabia and Russia closed the taps,” said Ravindra V Rao, VP-head commodity research at Kotak Securities.

India’s oil marketing companies (OMCs) like Indian Oil, HPCL and BPCL are directly impacted by rise in crude oil prices. And their margins have already fallen into the negative zone.

“A sharp rise in Brent price to around $90/bbl, driven by OPEC+ supply cuts, and surge in diesel cracks has led to OMCs’ blended spot auto-fuel gross marketing margin (GMM) declining to negative ₹0.1 per litre versus ₹8.8 per litre in 1QFY24,” said a report by J M Financial.

Historically, the gross refining margins for the sector is at ₹3.5 per litre. For OMCs to break-even, the crude oil price has to remain below $80 per barrel.

A rise in crude oil prices is good news for oil producers like ONGC, Reliance Industries and more who can gain from the rise in diesel cracks globally. However, windfall gains tax levied by the government might take the sheen off these margin gains.

Trouble in the air

The aviation sector is also set for a troubled year ahead if crude oil headwinds persist as fuel costs make up for over 40% of an airline’s costs. This, however, is only half of the troubles that the sector is facing.

The growth in its occupancy levels also seem to have hit a snag in spite of GoFirst’s grounding as well as flight cancellations by Akasa Air. After passenger traffic increased marginally month-on-month in August by 3%, the run rate seems to be flat in September. Also, July’s passenger load factor (PLF) showed a decline — reducing the ability of airlines to pass on their aviation turbine fuel (ATF) hit to passengers.

“Yields for airlines are witnessing a significant decline in second quarter given a seasonally strong base with airfares down around 10% QoQ, as per JM fare tracker). Further, recent rally in crude price is likely to result in higher ATF prices (up around 6% QoQ) for airline companies during 2Q,” says a J M Financial report.

Painting & cementing: A crude picture

The paints sector uses a significant amount of petroleum based raw materials. Like its peers in aviation, it’s also stuck between a rock and a hard place. They’re unable to increase prices due to muted sales growth and the benign impact of soft crude prices is going away.

It is noteworthy that Aditya Birla group company Grasim is entering the sector, into the decorative paints category. This, in turn, will mean that the competitive intensity of the sector will rise further and thus chip away at the ability to pass on rising costs.

“Crude prices have jumped by about 10% quarter-on-quarter in second quarter, at a time when the competitive landscape is prompting higher rebates and discounts,” said a report by Kotak Institutional Equities.

The cement sector is also hit by fuel prices twice over – as it impacts production as well as transport costs. Unlike their peers in the paints and aviation sector, the players are able to pass on the rise in costs to customers due to high demand. The rise in prices are anywhere between ₹10-35 per bag — thanks to strong demand fundamentals.

“The recent resurgence in fuel cost and supportive demand is stoking the price rise. In our view, sustainability of such hikes remains key given historically, sharp price hikes seldom sustain beyond a couple of months,” says a report by ICICI Securities.

The construction sector is buoyed by heightened activity in real estate coupled with the government’s infrastructure push. The margin impact on this sector might remain muted due to crude price rise for now.

Crude hit for personal care segment

FMCG giants too face the heat of rising crude oil prices as raw materials for some of its personal and home care categories. They have been rising prices selectively, increased local competition is also curtailing them. Demand has remained stable or growing very slowly especially in rural areas due to a cloudy monsoon picture.

Crude prices impact everyone as the transport cost of goods and raw materials get impacted directly. Thus, with a large section of corporate India vulnerable to the spiking Brent and the demand picture looking cloudy as well, a repeat of healthy profits shown in Q1 may be an uphill battle.