Falling oil prices to bring bonanza for consumer products, tyres, telecom

Credit Suisse report says lower commodity prices are a boon for India but the advantages are overstated

The fall in crude oil prices to below $60 a barrel are set to positively impact consumer staples, consumer discretionary spends (like tyres, paints), cement and telecom companies, says global bank Credit Suisse. On the economy, it says the consensus view of lower commodity prices being a boon for India is perhaps directionally appropriate, but overstates the advantages.

Here are the sectors set to gain from the falling oil prices: 

Consumer goods: The home & personal care companies have 40-50% of input costs linked to crude oil, and paints up to 25%. Some of the benefits though would be offset by the higher advertising spend by FMCGs and a likely price cut in the case of paints.  CS estimates a 10% drop in crude prices could result in a 1-7% increase in EPS (earning per share). There are also other benefits from reduced freight costs (5% of sales) and power and fuel costs (largely diesel, another 5-6%) that will show up with a lag, if they do. 

Tyres: Rubber forms 40% of raw material and crude linked products form the rest. The global bank estimates a 10% change in crude increases EPS by 20%. 

Telecom: The Indian telecom companies spend close to 4-5% of their mobile revenues on diesel in order to keep their base stations running in the face of acute power scarcity. Every 10% fall in diesel prices leads to a 1.2-1.4% increase in EBITDA (earnings before interest, tax, depreiciation and amortisation) for larger mobile operators. Urban-focused smaller operators though are likely to see much smaller benefit as they run on  grid electricity. 

Cement: CS says a 10% drop in oil prices drives 12-15% EPS increase, as they have moved their fuel requirements to petcoke due to domestic coal shortages. 

Economy: 

Balance of Payments (BoP): While lower oil prices definitely lower the import bill, given that weaker global demand is a driver of cheaper oil, India's exports are likely to get hurt as well (and they are). Further, as surpluses in capital exporting economies (like oil producers) get eroded, capital flows could get constrained as well. The overall BoP (balance of payment) surplus, therefore, should stay at US$40-45 billion. 

Inflation: Imported commodities are an insignificant part of CPI inflation—petrol and diesel together have a 2% weight in the index. Second-round effects of diesel's decline may also be limited; freight operators had not raised freight rates in the last three years despite a nearly 50% rise in diesel costs, and of late they are seeing some improvement in volumes. 

Fiscal deficit: The FY15 budgeted amount for fuel subsidies (Rs 63,400 crore or 0.5% of GDP), and that for fertiliser subsidies (Rs73,000 crore or 0.6% of GDP) may not change much for FY15, as Rs 35000 crore  of the oil subsidy is already spent (a carryover from last year), but should help the fiscal deficit assumptions for FY16.