Crude at $115: How rising oil prices are pressuring India's corporate margins

Indian equities climbed on Wednesday, with stock-specific gains following quarterly earnings helping offset concerns over rising crude oil prices. The recent uptick in oil came amid reports that the US may extend its blockade of Iranian ports, raising fears of tighter global supply.

Select market experts cautioned that persistently elevated crude levels could weigh on India's macroeconomic stability and corporate profitability, given the country's heavy reliance on imported oil.

At last check, ICE Brent Crude (April 30 expiry) was trading at $115.48 per barrel, up 3.79 per cent, while NYMEX crude oil advanced 4.19 per cent to $104.12 per barrel, underscoring continued strength in global oil prices.

"Market is holding up despite the rise in crude oil prices. However, investors should remain cautious at current levels as geopolitical tensions are yet to ease. Even if the Strait of Hormuz remains open, it may still take two to three months for the situation to stabilise. At present, unchanged retail fuel prices are supporting the economy, but the impact could be felt if crude sustains above the $110–115 per barrel range," said veteran Arun Kejriwal.

Echoing a similar view, Gaurav Sharma of Globe Capital highlighted that, as far as crude is concerned, "I see it quickly heading towards the $115–117 levels. Even a level close to $100 per barrel is already quite high for the Indian economy, and we are now trading much above that."

"Yet, the Indian markets are not reacting as negatively as they were earlier. I still maintain caution, as these persistently high crude levels will certainly have a negative impact," he added.

Ravi Singh, Chief Research Officer at Mastertrust, noted, "Crude oil crossing the $115 mark is beginning to show up clearly in corporate earnings across India. Since the country depends heavily on imports, higher crude prices quickly translate into increased costs for raw materials, transportation, and packaging. Compounding this is the severely weakened rupee, meaning companies are paying inflated global prices with a depreciated currency. The problem is, companies can't fully pass these costs on to consumers right away, which ends up directly squeezing margins."

Which sectors are most impacted and likely to feel the pressure?

According to Singh, sectors with high exposure to crude-linked input costs are bearing the brunt of the price surge. He mentioned that sectors like aviation, paints, chemicals, and tyres are feeling the pinch the most, as their cost structures are closely tied to oil derivatives.

"On top of that, retail fuel prices haven't moved much, which means Oil Marketing Companies (OMCs) are absorbing a massive part of the pressure themselves -- with brokerages warning their earnings could collapse by over 90 per cent," Singh added.

"If crude continues to stay elevated, overall earnings growth is likely to slow. Companies will either have to gradually increase prices, tighten their operational costs, or simply operate with lower margins in the near term," he further stated.