OMCs, paints, cement firms to benefit as oil crash rebuilds hopes

The escalating coronavirus fear and price war between oil producing countries led to a sharp 23% one-day fall in crude oil prices on Monday

The sharp fall in crude oil prices, concerns over impact of coronavirus on global economic activity, and the contagion effect of YES Bank crisis weighed on Indian equity markets on Monday. However, expectations of lower crude oil prices going ahead are likely to benefit some sectors/stocks, which is good news given the overall muted demand environment.

The escalating coronavirus fear and price war between oil producing countries led to a sharp 23 per cent one-day fall in crude oil prices on Monday, with Brent touching $34.9 per barrel. On Tuesday, oil prices rose by around 8 per cent as investors eyed the possibility of economic stimulus and Russia signalled that talks with OPEC remained possible. Brent crude futures were up $2.80 to $37.16 a barrel by 7.25 IST, after hitting a session high of $38.22 a barrel.

According to Gnanasekar Thiagarajan, director of Commtrendz, “Crude has been under pressure already due to demand destruction on the back of the coronavirus threat. And now, the unexpected potential rise in supply has put the crude oil market in a tail spin. Technically, market would be inclined to test 2016-low level of $25 per barrel levels for Brent.” 

However, Thiagarajan also believes that due to some recovery expected once the coronavirus impact starts getting abated, the year should end positively with oil closing to $40-45 per barrel. Still, this would be 32-40 per cent decline year on year. 

 

 

At a time when overall demand is tapering, lower crude oil prices is a blessing for many Indian companies. “Lower oil prices would help Indian companies maintain a good balance between volumes/topline and profitability,” says Pradeep Kumar, senior vice-president-strategy at Elara Securities.

Firstly, oil marketing companies (OMCs) such as Indian Oil, Hindustan Petroleum, and Bharat Petroleum should benefit as crude oil is their key raw material. Lower oil prices will not only help them in terms of higher marketing margin but will also lower their working capital requirement. Moreover, it also eliminates and subsidy sharing burden.

Other sectors, which tend to benefit from lower oil prices, include paints and adhesives, cement and lubricants (Castrol and Gulf Oil). While paints and adhesives’ key raw materials such as titanium dioxide or monomers are crude linked, cement players have a high share of fuel cost in their total production expenses. Crude oil-derived inputs account for 20-35 per cent of paints and adhesives’ raw material costs. 

While players engaged in plastic building material also have at least 30 per cent of their raw material costs accounted by crude-based inputs, how much they benefit amid intense competition needs to be seen. These firms may have to pass on lower input cost benefits to end-consumers, say analysts. 

Tyre and aviation players, which also use crude-derived materials/fuel, will benefit. But, the gains will vary due to demand and supply-chain worries because of the coronavirus outbreak. Guarva Dua, head of research at Sharekhan, believes demand pressure for automobile and aviation segments is severe, which is more important. Unless the demand concern is not behind, the lower oil benefits may not be significant.

Overall, the crude oil plunge has come in as a blessing for many Indian players. It needs to be seen how companies cash in on these benefits to balance their top line and profitability when overall demand is sagging, say experts.

“Though global demand is muted due to coronavirus, we believe that lower prices of crude oil would help Indian companies to maintain a good balance between volumes/topline and profitability,” says Kumar of Elara Securities. 

One also needs to watch out for rupee’s movement as further depreciation could partly offset benefits arising from oil’s fall.