Costlier oil & coal may hurt cement, FMCG companies

Analysts warn that markets will react negatively if Brent breaches $90 a barrel

The rising prices of crude oil and coal, which have risen nearly 8 per cent and 15 per cent in the past month, can spoil the party for India Inc as it will face input cost pressures, experts warn.

While the impact could be significant, analysts say it will be difficult to paint the entire universe with the same brush as the rise in commodity prices will benefit their respective producers.

The markets, on the other hand, will react sharply negatively in case oil jumps above $90 a barrel, analysts caution.

Analysts at Bofa Securities, led by Amish Shah, their India equity strategist, suggest 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 that of cement companies, can come under pressure.

These companies, Shah believes, could try to partially offset this with price hikes around late October/early November as construction activity picks up after the monsoon.

“Cement companies, for example, have 75 per cent of their power and 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 and diesel costs could result 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.

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 fastmoving consumer goods (FMCG) companies could also face cost headwinds,” Bofa Securities said.

The winners

However, there will benefit from such a scenario. 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 and higher power costs (40 per cent in total costs) for Chinese aluminium producers, along with capacity suspensions should augur well for LME aluminium 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 the boil

In a recent report, analysts at Goldman Sachs suggested that they see Brent crude oil prices at $90 per barrel by December (earlier forecast of $80 a barrel) on the back of a larger-thanexpected supply-demand deficit.

According to G Chokkalingam, founder and chief investment officer at Equinomics Research, the rise in coal prices is transitory and can be managed. Oil, on the other hand, 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 of Geojit Financial Services, is making markets nervous after a sharp run-up in the benchmark indices over the last few weeks. “Investors should look to buy the dip and invest in fundamentally sound companies,” Shah advises.