With the world interconnected, every geopolitical tension has a rip-off effect on India Inc.This time around, the impact of the Russia -Ukraine conflict could be mixed. For instance, some experts opine that India may stand to gain from the crisis. Russia is the third largest exporters of crude oil and China is heavily dependent on Russia for its inventories. If China faces disruption on supply and manufacturing sides, Indian companies could benefit as they are seen as the next best low-cost manufacturing base after China. Same holds for iron, steel and base metals.

That said, a possible price escalation in commodities due to supply constraints is likely. This may send crude oil and metal prices further up from Friday’s levels. Edible oils such as sunflower, palm oil and soya oil, prices of which have risen by 2 – 3 per cent since February 24 could further move up. India’s non-crude oil imports, especially sunflower oil is high from the two countries – 70 per cent from Ukraine and 20 per cent from Russia.

India Inc is already grappling with elevated raw materials costs and thinning operating margin. With demand just about firming up, can companies hike prices after the recently concluded round of hikes in December last year is doubtful. In case a price pass-through is challenging, can companies cede margins to absorb the cost pressures? While March quarter results will give investors an insight on this, the Catch-22 situation may last longer.

Given that crude and its by-products form a critical component across industries, from airlines to cement to pharmaceuticals, its unlikely that any sector is spared. But here are the ones which may bear the direct brunt:

Oil marketing companies: With government levies also accounting for a major chuck of the pricing apart from crude prices, OMCs have limited flexibility to pass on the cost pressures.

Automobiles: Until December companies had some room to pass on the increase in raw material costs, particularly metals and rubber. But with sales volumes already impacted by semiconductor shortage so far, further price hikes may not be easy to pass on. Demand recovery may be extended further in price sensitive segments such as two-wheelers.

Auto components: Limited room for the OEMs may compel component makers to absorb higher raw material prices.

Industries allied autos: Segments such as lubricants and tyres often augmented by replacement demand in addition to demand from OEMs may have an edge over component makers to pass on the cost pressures. By-products of crude is the main raw material here. With a reasonable margin erosion already playing out, demand from replacement market (where pricing power is better) will play a key role in ensuring that profitability doesn’t take a further knock.

FMCG: Vulnerable to fluctuations in the non-crude oils and wheat prices, most consumer non-discretionary companies have had few rounds of price hikes last year. Seen along with tapering rural demand in the recent December quarter, the possibility to hike prices further is limited. Companies may have to resort to reducing grammage and controlling costs such as advertising expenses.

Home use segments: For cables, paints, pipes, plastics and packaging (though indirect) crude derivates form a chunk of their raw materials. These segments typically witness better demand in the first half of the calendar year from January – June as people upgrade or renovate their homes, leaving some room for companies to pass on raw material pressures. Yet, as demand isnt fully buoyant, the leeway is limited.

Consumer durables: Base metals, mainly copper, forms an integral part of raw material costs for air conditioner makers. As with home use segments, demand isn’t brisk yet and this may force companies to absorb the raw material pressures.

Related Topics
comment COMMENT NOW