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Cheaper crude oil soothes India Inc’s nerves

Some are treating the price correction as akin to a fiscal stimulus that could kick start a new demand cycle in the economy.

India Inc is finally seeing some silver lining and is talking in terms of a macro economic headwind turning into tailwind. That courtesy the recent fall in crude oil prices and the general downtrend in commodity prices.

decided to go long the day we were convinced about the declining trends in crude oil and gold prices, says Devang Mehta, vice president and head of equity sales, Anand Rathi Financial Services. the current trend in prices sustains, most of our macro economic problems will be taken care of by the end of the current financial year. Some are treating the correction as akin to a fiscal stimulus that could kick start a new demand cycle in the economy.

Commodity prices have been on a downward trajectory since the beginning http://www.cheapjerseys11.com/ of 2013. In the last three months, crude oil and industrial metals such as copper and aluminium have shed 12 13 per cent of their value, while coal prices are eight per cent lower. Steel has seen a smaller impact, with prices down 4.5 per cent.

energy and commodity prices will reduce the project cost for investors and companies and improve the internal rate of return on new projects, says M S Unnikrishnan, managing director and CEO of Thermax, one of India top capital goods makers. would potentially induce companies to launch new capex projects. energy prices would raise household disposal income, which would boost demand for consumer products, he says. This would encourage companies to expand capacity, generating more demand for capital goods and industrial raw materials, Unnikrishnan adds.

Analysts agree, but are keeping their fingers crossed.

Dhananjay Sinha, head of research at Emkay Global Financial Services, says: are positive spin offs to corporate earnings and capex cycle from lower commodity prices, but only if lower prices are sustainable. We also need to balance its negative impact on commodity producers such as metal companies to see the net impact on India Inc. see indirect gains through the beneficial impact on India fiscal deficit and public expenditure. in crude oil prices translates into a lower subsidy bill for fuel and fertilisers and lower fiscal deficit, says Ashok Banerjee, chief financial officer of Shree Cement. will provide the finance minister the headroom to spend more on infrastructure projects. More projects mean greater demand for cement.

Total underrecoveries on fuel are expected to halve to around Rs 80,000 crore in FY14 against Rs 160,000 crore estimated earlier. The underrecovery on diesel accounting for 45 per cent of India overall fuel consumption last year is likely to have fallen to Rs 2 a litre now from a high as Rs 11 a litre two months ago, says the report. Oil marketing companies (OMCs) and upstream companies would be direct beneficiaries of weaker crude prices. According to CRISIL, this will lower working capital requirements of OMCs, improving profitability and cash flows.

Trends suggest crude oil prices impact India Inc performance with a lag of three four quarters. In the December 2012 quarter, power and fuel cost accounted for 3.5 per cent of the Nifty 50 firms aggregate revenues and around 5.2 per cent of their operating expenses. Given this, every 10 per cent fall in energy cost expands Nifty companies earnings per share by 35 basis points (100 basis points makes one per cent).

Crude oil being a universal input, either by way of energy or by products such as petrochemicals and plastics, lower prices would mean cheaper raw material for companies. In the December 2012 quarter, raw material costs accounted for 30.7 per cent of the net sales of all Nifty 50 companies. Power and fuel costs as a proportion of revenues peaked in the June 2010 quarter, but raw material cost reached their high in the September 2011 quarter, after a lag of nearly five quarters. However, for the cement industry, which is the most energy intensive sector among the Nifty 50, cheaper fuel would only have a limited impact on operating margins, as they either burn coal or pet coke in kilns.

is a very weak price correlation between crude oil and coal prices and the two can move independent of each other, says Krishna Srivastava, whole time director, Zuari Cement. According to him, margins would improve only if OMCs cut diesel prices, leading to a cheap jerseys fall in freight cost. Power and fuel, on an average, account for around a quarter of the net sales of cement makers, followed by freight cost at 20 per cent.
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