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Rising prices of crude oil – up nearly 8 per cent and 15 per cent in the past one month – can spoil the party for India Inc as it will face input cost pressures, say experts. That said, it will be difficult to paint the entire universe with the same brush as the rise in commodity prices will benefit their respective producers. Markets, on the other hand, will react sharply negatively in case the oil jumps above $90 per barrel mark, analysts caution.
Analysts BofA Securities led by Amish Shah, their India equity strategist, suggests that though the tax buffer available with the government can cushion the fiscal impact of the rise in prices of these two commodities, India Inc’s earnings, especially cement companies, can come under pressure going ahead. These companies, he believes, could try to partially offset this through price hikes around late October / early November as construction activity picks up post monsoon.
“Cement companies, for example, have 75 per cent of their power & fuel costs exposed to coal, 40 per cent of road freight costs (70 per cent of total costs) exposed to diesel. A 5 per cent rise in both coal & diesel costs could results in 100 basis point (bps) sensitivity to margins, translating to 3.5 per cent (Ultratech, Ambuja) to 4.5 per cent (ACC) EBITDA impact,” BofA Securities said. CLICK HERE FOR THE GRAPHIC
With fuel accounting for over 50 per cent of costs for truck operators, slower rise in truck rentals versus diesel is likely to impact truckers' profitability and new commercial vehicle demand. “Besides, aviation, paints and fast moving consumer goods (FMCG) companies could also face cost headwinds,” BofA Securities said.
The winners
On the other hand, commodity producers such as Coal India and Tata Power, BofA Securities said, could benefit. Tightening of coal demand supply balance in China, for instance, continues to support global thermal coal prices. As a result, Coal India could benefit from rising price of imported coal as the spot prices (e-auction) move up.
"We estimate Coal India to see 20 per cent of its volumes in the e-auction market in FY23 with earnings rising by 11.5 per cent for every 10 per cent rise in e-auction prices," BofA Securities said.
Besides, shortages & higher power costs (40 per cent in total costs) for Chinese aluminum producers, along with capacity suspensions should augur well for LME aluminum prices. In this backdrop, BofA Securities expects Hindalco to remain in an advantageous position and sees FY23 earnings rise by 1.7 per cent for every $50/tonne rise in LME.
Oil on a boil
In a recent report, analysts at Goldman Sachs suggested they see Brent crude oil prices at $90 per barrel by December 2021 (earlier forecast of $80 a barrel) on the back of a larger-than-expected supply-demand deficit.
According to G Chokkalingam, founder and chief investment officer at Equinomics Research, rise in coal prices is transitory and can be managed. Oil, he feels, is a serious issue. “The markets can tolerate oil prices till about $90 a barrel. Any spike above this level will create problems for the government in terms of managing the fiscal situation and create inflationary headwinds, which the markets will not tolerate,” he said.
High oil prices and a weak rupee, according to Gaurang Shah, Senior Vice President, Geojit Financial Services, is making markets nervous after a sharp run up seen in the benchmark indices over the last few weeks. “Investors should look to buy the dip and invest in fundamentally sound companies,” Shah advises.
