The fall in crude oil prices is expected to boost the profit margins of India Inc, especially that of paint and tyre companies, as the derivative from crude oil is the basic raw material in these sectors.
Brent crude prices have fallen six cents to $92 a barrel while the US West Texas Intermediate crude futures declined 16 cents to $90.34 a barrel on Wednesday, on the fear of consistent lending rate hike leading to a global recession, especially in the US and Europe. Brent crude, which is more relevant to India, has fallen from a high of $124 per barrel ever since the US Fed started increasing the interest rates.
Demand is back
The fall in raw material prices comes when the demand in both paint and tyre sectors has bounced back after suffering for a prolonged period during the Covid pandemic.
Vinod Nair, Head of Research, Geojit Financial Services, said the Brent crude posted its worst weekly drop of the year at 14 per cent to close at $94.7 per barrel, and it was the lowest since February. “Profit from the deflationary raw material prices will start reflecting in the paint and tyre business margins from the second half of this fiscal, while the fall in metal and other costs will also boost margins,” he said.
This apart, volume growth in the auto sector is expected to remain robust in double digit after a fulfilling monsoon, upcoming festivals, and the marriage season, he added.
Almost all the paint companies such as Asian Paints, Berger Paints, Kansai Nerolac Paints and Akzo Nobel India reported better net profit in the June quarter as they managed to pass on the incremental cost to customers by rising the final product prices.
Roaring out of the semiconductor supply issue, the passenger vehicle segment was firing on all cylinders despite the supply chain challenges. Overall passenger vehicle sales were up 15 per cent last month at 3,24,650 units compared to the same period last year. The sales were boosted by pent-up demand and launch of new models in the market. Maruti Suzuki India, the country’s largest carmaker, sold 1,29,802 vehicles, which was up 15 per cent compared to June. Hyundai Motor India’s sales increased 3 per cent month-on-month to 50,500 units in July.
Higher automobile sales will lead to increase in demand for both paint and tyre companies. Mitul Shah, Head of Research, Reliance Securities, said that paint and tyre companies have been steadily taking price hikes but in tranches, in order to protect sales and avoid hurting customer’s sentiment.
With better monsoon and recovering rural economy, the demand is expected to remain strong in both these sectors. Healthy growth in housing and infrastructure sector would also support paint sector, he said.