Unsurprisingly, following the escalation of geopolitical tensions, Indian stock markets took a nosedive. In early trading Thursday, the BSE Sensex and Nifty50 indices fell more than 3%.
Rising oil prices are bad news for the Indian economy as it imports the lion’s share of its fuel needs. So over the past year, benchmark crude prices have now risen more than 50%. In the near future, oil prices can be expected to remain firm. “We expect crude oil prices to remain volatile and rise from current levels if geopolitical concerns do not subside materially,” a Kotak Institutional Equities report noted on Feb. 23. The brokerage added, “We maintain our current oil price estimate of $80 per barrel in fiscal year 2023 at this time, while noting upside risks if geopolitical concerns persist over the next few months. month. “
For India, higher prices have a negative influence on inflation and the country’s current account deficit (CAD). Even so, in an environment of higher oil prices, upstream oil companies such as Oil and Natural Gas Corp. Ltd (ONGC) and Oil India Ltd should benefit. Already, both companies saw a significant jump in their price realizations during the December quarter (Q3FY22) results. For example, the realization of ONGC crude was up 75% year over year (year-on-year) and 9% sequentially to $75.7 per barrel. To that extent, higher crude prices have offset the weak production outlook for these companies. ONGC shares have appreciated more than 40% in the past year, suggesting that investors are pricing in optimism adequately.
For state-owned oil marketing companies (OMCs), marketing margins are under pressure if retail prices at the pump do not rise enough when crude prices rise. Currently, retail prices are below market prices. “After the election, retail prices are expected to rise and from an inflation perspective that would be negative,” said an analyst on condition of anonymity. He added: “The reduction in excise duty in November was helpful and it remains to be seen whether further reductions will come which would lessen the blow to the consumer,” he added.
It should be noted that rising oil prices are detrimental to most businesses. Moreover, this comes at a time when companies are already struggling with cost inflation at various levels. For example, as rising oil prices increase packaging costs for fast-moving consumer goods (FMCG) companies, sole proprietorships also face rising other input costs. Add to this that demand in the rural market has slowed. Companies have raised prices and investors will be watching how much this helps gross margins.
Additionally, some analysts believe that if consumers end up spending more on fuel, demand for consumer discretionary products could suffer.
In addition, for cement plants, the increase in oil prices leads to an increase in petroleum coke prices. In addition, transport costs generally increase, which weighs on margins. Note that electricity and fuel expenses represent 25-30% of the total operating costs of the sector.
For paint companies, however, there could be some respite as paint makers took significant price increases in the decorative coatings business this fiscal year. Paint companies use crude-based derivatives such as monomers. Analysts expect March quarter results (Q4FY22) to fully reflect the impact of price increases taken, supporting margin recovery.
For airlines, jet fuel accounts for a significant portion of operating costs. Therefore, the rise in oil prices is not welcome. In the third quarter, InterGlobe Aviation Ltd’s fuel CASK increased approximately 90% year-on-year and 13% sequentially. CASK is the cost per available seat kilometer and is a unit of measurement. Brent prices averaged $79 per barrel in the third quarter and so far in the fourth quarter they are around $90 per barrel. It helps that domestic traffic data shows a recovery in February after a dismal January. How the traffic recovery will play out in the future is critical, as is the strength of yields, a measure of pricing for airlines. Shares of InterGlobe and SpiceJet Ltd were down about 5% in Thursday morning trading.
To be sure, high oil prices also pose a risk to the global recovery. “If prices remain at current levels or rise further, cost pressures would further increase for a host of industries and household purchasing power would decline, slowing the pace of the global recovery,” a Moody’s report said. Global Macro Outlook published on February 23. The report added: “We expect oil prices to decline gradually in the second half of 2022 and continue to decline in 2023.”
Meanwhile, crude oil is not the only concern for India. In a Feb. 21 note, Jefferies India said, “India sees the prospect of a ‘twin’ deficit – fiscal and CAD – simultaneously over the next 12 months. -oil, non-gold up 20% over 2 years now) and the recovery in local demand, as well as high commodity/oil prices, could keep the current account under pressure. We estimate the CAD at 2.5% of GDP for FY23 (80 USD/bbl assumption), 10 years high.”
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