How Lower Crude Oil Prices Affect India Inc.
As the Modi government struggles with a shortfall in tax revenue in a slowing economy, it received an unexpected boost: an oil price plunge.
Brent crude, the Asian benchmark, has tumbled more than 17 percent so far in 2020 in the worst start to a year since 1991, according to Bloomberg data. That came after the novel coronavirus outbreak in China that has so far claimed nearly 500 lives in the world’s biggest importer and infected tens of thousands. The economic activity in the world’s second-largest economy has virtually halted, raising concerns that the demand for gasoline, diesel and jet fuel will drop in an already well-supplied market.
That’s expected to keep prices in check. Low oil prices would help India, the world’s third-biggest importer of oil, to narrow its fiscal deficit at a time the government estimates to overshoot the target. Cheaper crude would also reduce fuel and freight costs for a host of companies, helping contain inflation.
Here’s how a fall in oil prices affect Indian producers and companies that use crude or crude products as raw material…
Oil & Natural Gas Corporation Ltd. and Oil India Ltd. could see an impact on their realisations—the price at which the product is sold—and margins in the coming quarters due to the sharp fall in crude. But lower crude will remove the overhang of sharing the government’s subsidy burden. The government has budgeted a petroleum subsidy of Rs 37,500 crore for FY20 against Rs 24,900 crore a year ago. That came even as crude has averaged lower at $55 a barrel for most of the ongoing financial year compared with $70.86 per barrel last year.
Oil marketing companies such as Indian Oil Corporation Ltd., Hindustan Petroleum Corporation Ltd. and Bharat Petroleum Corporation Ltd. may cut retail fuel prices as crude declined. They also have a leeway to earn higher marketing margin, or mark-up, on sale of every litre of petrol and diesel by not passing the entire benefit of a drop in crude prices to consumers.
Higher marketing margin may benefit HPCL and BPCL more as retail sale of fuel contributes nearly 60 percent and 40 percent, respectively, to their operational profit, according to BloombergQuint’s estimates.
But there’s one risk. A fall in crude prices may also lead to inventory losses. That’s because oil marketers that bought stock at higher prices sell through retail outlets at lower rates.
Fuel contributes about a third of airlines’ total operating cost. And lower fuel prices may aid the margin of airlines in the quarter ending March at a time they are struggling to increase airfares in a slowing Indian economy.
Operating margins of Indian lubricant manufacturers fell in the quarter ended June on higher crude prices. But as the prices of the raw material fell, the companies’ margins improved in the second quarter. That came even as they cut prices to pass on the benefit of lower crude to customers. Going by the trend, the lubricant makers may see better margins in the coming quarters.
Crude accounts for nearly half of the total expenses for Asian Paints Ltd., Berger Paints India Ltd. and Kansai Nerolac Paints Ltd., among others. Paintmakers, too, witnessed an improvement in their gross margins in the quarter ended September as crude prices dropped. And that trend may continue as oil has averaged lower for most of the ongoing fiscal compared to last year.
To be sure, besides higher crude prices, a poor performance of automotive business caused Kansai Nerolac’s margin to remain flat in the first quarter. The automotive business contributes nearly 55 percent to the paintmaker’s revenue.
Tyre companies use crude derivatives such as synthetic rubber and carbon black as raw materials. And a drop in crude prices may boost operating margins of these companies. But recently, a fall in volumes due to slowdown in agriculture and off-the-road tyre business in Europe and the U.S. limited the gains for Balkrishna Industries Ltd.
A rise or fall in crude prices affects cement makers directly and indirectly—there’s fuel cost for power as well as for transporting raw materials and the final product. On an average, analysts estimate that 40-50 percent of the cement makers’ total cost is directly or indirectly related to crude. A change in crude prices impacts operating margins of Indian cement makers.