scorecardresearchHigher crude oil prices may spoil margin, growth of Indian firms, says report

Higher crude oil prices may spoil margin, growth of Indian firms, says report

Updated: 17 Mar 2022, 09:46 AM IST
TL;DR.

 Q4FY22 and Q1FY23 may be challenging for many companies because of the higher crude oil and raw material prices.

Elevated crude oil prices pose a serious threat to the macro health of the country and if the crude prices remain below $100, the growth momentum can continue.

Elevated crude oil prices pose a serious threat to the macro health of the country and if the crude prices remain below $100, the growth momentum can continue.

The fourth quarter (Q4) may be a difficult quarter for many companies as rising input costs will make it challenging for companies to maintain growth and margin, said Jinesh Gopani, Head of Equities, Axis Mutual Fund, in an interview with ETNow.

"Q4 is going to be very difficult and it will be a challenging quarter for many companies to demonstrate growth and margins. We will have to see how things go for various sectors. Various companies will have different numbers and that will decide how markets will move and how the flows move to different sectors," said Gopani.

Gopani added that even the Q1FY23 may be challenging for many companies because of the higher crude oil and raw material prices.

"The crude oil price moves, the raw material cost moves will not get reflected in this quarter because there are 30 to 40 days’ lag impact. However, if things subside on the raw material front and oil and other commodities come off significantly over the next one or two-month period, then there will be a gradual recovery and numbers will come only maybe from Q2 onwards," he said.

Elevated crude oil prices pose a serious threat to the macro health of the country and if the crude prices remain below $100, the growth momentum can continue, said Gopani.

"Oil below $100 should be good to keep the momentum going and the GDP growth momentum can continue if we do not have the fourth wave of Covid. If that continues, I think we will be in good shape three months down the line," said Gopani.

Gopani believes it will be tough for consumption and FMCG companies - that are struggling with higher input costs - to pass on the prices.

"Companies which are leaders in their space have 60-70 percent market share in their product category. They will be in a better position. We are only sticking to those companies which have a large market share, the ability to manage inflation while passing on 70-75 percent of the costs and then bringing in efficiencies and managing the margins. The leaders, the strong brands, would do well but the me-too FMCG consumer staple companies will struggle," said Gopani.

Crude oil prices have eased in the last few days as traders reacted to hoped-for progress in Russia-Ukraine peace talks and a surprising increase in US inventories. Brent traded in a $6 range, between $97.55 and $103.70 before settling at $98.02, down $1.89 a barrel, or 1.9 percent on March 16.

Last week, international crude oil prices shot up to a14-year high of $140 per barrel.

Finance Minister Nirmala Sitharaman in the previous week hinted that the current spike in international oil prices may upset provisions of her Union Budget for the fiscal year beginning April 1 as she voiced concern over the impact of spiralling oil rates on the Indian economy.

India relies on overseas purchases to meet about 85 percent of its oil requirement, making it one of the most vulnerable in Asia to higher oil prices.

The twin blows of oil prices, already up more than 60 percent this year, and a weakening rupee may hurt the nation's finances, upend a nascent economic recovery and fire up inflation.

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First Published: 17 Mar 2022, 09:46 AM IST