A 20% fall in crude in under a week reshapes the outlook for many Indian companies. Tuesday’s results from Apollo Tyres show how much oil costs have been squeezing margins.
Brent crude has fallen from near $118 a barrel last Friday to about $94, after Democrats won control of the US Congress and the White House linked its election defeat to the Iran war. For Indian companies, the effect will vary widely. For some, it is a significant boost. For others, it reverses gains they enjoyed during the crisis.
The companies that gain
Oil marketing companies. IOC, BPCL and HPCL sell petrol, diesel and household LPG at prices that change slowly or are set by the government. When crude falls, the gap between their costs and selling prices widens, improving marketing margins.
There is a catch, though. These companies booked large inventory gains in the September quarter as crude rose. IOC alone recorded ₹6,948 crore. A sharp fall now creates inventory losses in the December quarter, which will offset part of the margin gain.
Tyre makers. Synthetic rubber, carbon black and other tyre raw materials are derived from crude, so oil prices feed directly into costs.
Apollo Tyres’ results, released on Wednesday, show how much this has hurt. Consolidated net profit rose 13.3% to ₹292.29 crore and revenue rose 16.6% to ₹7,968.15 crore. But expenses rose 20.5%, faster than revenue, and profit before tax barely moved, rising to ₹396.18 crore from ₹386.08 crore. Strong sales growth produced almost no increase in pre-tax profit because costs rose faster.
If oil stays near $94, tyre makers’ raw material costs should ease over the next one to two quarters, which would widen margins.
Paint companies. Many paint raw materials are crude derivatives. Asian Paints reported a 2 percentage point fall in EBITDA margin last month as costs rose. Lower crude would help reverse that.
Airlines. Jet fuel is the largest cost for airlines such as IndiGo. Aviation turbine fuel prices in India were raised for the fourth straight month on 1 November, to ₹138.50 a litre. A sustained fall in crude would lead to price cuts in the coming months.
Consumer goods companies. Oil affects packaging, transport and some ingredients. The Nifty FMCG index has already risen sharply this week on lower oil.
Producers and refiners
Companies that produce crude could see lower revenue per barrel. While ONGC reports results on Thursday, its September-quarter figures will reflect high oil prices. The bigger question is what management says about the outlook at lower price
On the other hand, there were high refining margins during the crisis because Gulf fuel supplies were disrupted. If peace restores Gulf supply, and oil stays low, those margins will tend to slide. The government would also collect less from its windfall levy on fuel exports.
Coal and power producers. Coal and power producers have benefited from strong demand for domestic power while imported energy was expensive. Lower oil and gas prices reduce that advantage only slightly, since coal remains India’s main power source.
What investors should watch
The key question is whether oil stays low. The fall is based on expectations of a settlement, not on the Strait of Hormuz reopening. If talks fail, oil could rise just as quickly.
For investors, the companies with the clearest benefit are those where crude is a large part of costs and prices cannot easily be raised: tyre makers, paint companies, airlines and oil marketers. Those that benefited from the crisis, such as upstream producers and export refiners, face weaker earnings if lower prices last.
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