Oil’s slick grip threatens corporate margins
Corporate margins and profits in India remain vulnerable to changes in crude oil prices in the international market. Historical quarterly data from listed companies (excluding banks, finance and insurance, oil and gas, and power sectors) indicate an adverse correlation between corporate margins and crude oil prices.
An increase in companies’ core operating margins was observed in 2020-21 (Fy21) following a sharp decline in crude oil prices in the first half of calendar year 2020 after the outbreak of the pandemic.
For instance, operating margins reached a record high of 20.3 percent of net sales in the october december quarter offy 21 as oil prices dropped to a record low of $33.7 in the
April-june quarter (Q1) of Fy 21 from $66.4 a year ago. however, margin gains for companies were reversed in 2021-22 (Fy22) and the early part of2022-23(fy 23) as Brent crude oils urged to a record high of $113.8 per barrel inq 1fy 23. this rally was fuel led by post-pandemic economic recovery worldwide and supply-chain disruptions caused by the Russia-ukraine conflict. elevated energy prices led to increased operating costs for indian companies, resulting in a decline incorporate margins to 15.5 percent of net sales in the July- september quarter offy 22 quarter from 19.6 percent a year ago. this cycle reversed again infy 23 as crude oil prices declined, boo sting corporate margins.
This cycle is once again swinging, with brent crude oil up nearly 18 percent since the end of december 2023.
As in the past, the rise in crude oil prices has been accompanied by an increase in industrial commodity prices as well. for instance, the London Metal Exchange, which tracks prices of industrial metals like copper, aluminium, zinc, and lead, is up 10 per cent year-to-date. this is likely to result in higher manufacturing costs for indian companies, with ala goff our to six months.
“In the past two/ three quarters, gains in corporate profits largely resulted from a decline in energy and commodity prices, while revenue growth was in low single digits. these gains are likely to reverse in forthcoming quarters if there centrally in crude and commodity prices sustains ,” says D han an jay sin ha, co-head of equities and head of research at system at ix group.
Here are the 12 companies from the BSE 500 universe that could experience significant impact from a rise in crude oil prices. The analysis excludes oil and gas, power producers, and gems and jewellery companies.