Paints, tyres, gas distribution and oil marketing companies are expected to gain from record drop in crude oil prices, according to a latest report. With both Brent and West Texas Intermediate (WTI) crude dropping to levels not seen in the last many decades, these companies could see a boost in earnings, YES Securities said in a report on Wednesday. A reduction in input costs is likely to help the earnings of the cement and paints companies, it said.
Paints: A 10 per cent correction in crude prices is expected to increase earnings by 4 per cent for the paint companies with other things remaining the same, the report added. "Crude and crude derivatives account for 60% of the RM basket. For paints companies, Titanium Dioxide (a crude derivative), fillers/packing material and other crude linked products accounts for nearly 60% of the RM basket," it added.
Cement: Fall in oil prices is encouraging for cement companies as 40% of the cost is indirectly linked to crude. "Expect 10-12% YoY reduction in input cost for FY21 through diesel and coal," YES Securities said.
Oil marketing companies: With crude oil prices falling, the working capital requirement of oil marketing companies (OMCs) is likely to ease, the report said. The current fall in prices will benefit working capital slightly offset by rupee depreciation, YES Securities added. "Our calculation suggests that amongst the three OMCs 15 days of crude inventory and a fall of $30 per barrel would mean a lower inventory of nearly Rs 81 billion," it also said.
City gas distribution companies: The city gas distribution (CGD) companies such as IGL, MGL, Gujarat Gas price their products (CNG and PNG) at a discount to the comparable crude based products (CNG - Petrol/Diesel, PNG - LPG). "While the crude oil prices have corrected sharply, OMCs have not cut petrol and diesel prices in similar quantum. On the other hand, the government has raised excise duty on the same. Hence, the impact of the current sharp fall in crude oil prices for CGD players would depend on the quantum of price cuts done for petrol, diesel and LPG," the report said.
Tyre manufacturers: The natural rubber accounts for 37 per cent, while crude based derivatives such as carbon black and synthetic rubber constitute another 50 per cent of cost for production of a tyre. "Based on the product portfolios, impact would be materially different for companies. As a thumb rule, in a CV tyre 40% in terms of weight is contributed by natural rubber, 25% in passenger cars and 15% in 2Ws. Accordingly, the benefits of falling crude oil prices will be higher for two-wheeler tyres, followed by passenger car tyres and then CV tyres," the report added.
In addition, logistics and companies with exposure to Middle East businesses can see a positive impact. Meanwhile, the crude oil prices in the US fell to a historic minus $37.63 a barrel on Monday due to coronavirus-related demand issues. The Brent crude, which is the more relevant benchmark for India, has dropped over 65 per cent so far in 2020. It is currently hovering at around $17 per barrel, down from more than $28 a barrel last week.