Lower commodity prices, including crude oil, will help Indian companies improve their operating margins
A sharp fall in commodity prices across segments in the past couple of months is expected to rescue India Inc from shrinking profitability in 2013-14.
The fall is 15-20 per cent. Metal prices in India have fallen by seven to 10 per cent during the period.
Since mid-February, the commodities market has seen a reversal following the European debt crisis and fear of an early phasing out of the US Fed's quantitative easing programme. Last week's news on China's lower-than-expected economic growth has added to the trend. Base metals are down 15 per cent on an average, while Brent crude oil lost 17 per cent. Rubber is down 23 per cent.
"Lower commodity prices, including crude oil, will help companies improve their operating margins, which has been under stress, and if recent rate cuts by RBI will slowly be transmitted," said D K Joshi, chief economist, CRISIL. He also said demand is expected to pick up gradually and this year being election year consumption will increase. Normalcy of monsoon will play an important role in rural demand.
"A fall in commodities' prices, along with sharp fall in crude oil prices, can dramatically improve Indian companies' net profit margin. Manufacturing companies will be major beneficiaries, as two-thirds of their cost of production is raw material cost," said Mahesh Vyas, managing director of Centre for Monitoring Indian Economy, an independent think tank.
"Assuming the recent fall in commodity prices sustains, India will figure among the biggest winners in terms of higher growth, lower inflation and/or better economic fundamentals," said Rob Subbaraman, Nomura's chief economist for Asia ex-Japan, in a recent report on the impact of falling commodity prices.
Tokyo rubber futures prices, which set the global trend, fell more than three per cent to a five-month low of 242.6 yen a kg on Thursday