Most of you out there may believe that Indian Stock Market is largely driven by company-specific factors. We had the same conjecture, until we bumped into an article, which showed that about 60 per cent of movement in stock prices is because of macro-economic factors. (People who are curious and want more insight on the same can contact us)
So, let’s analyze one such macroeconomic factor: Crude Oil, the most talked about topic in recent times.
Crude Oil prices have been swinging like a pendulum, going up and down in a matter of days, and now after a continuous decline it has started heading north. For India, an increase of $10/barrel in oil price has an adverse impact of $10-11 billion (or 0.4% of GDP) on current account deficit; for a country which imports more than 82 per cent of its oil requirement, any volatility on the upside could have a cascading effect on the economy (from inflation to interest rates).
Some of the sectors which get most affected directly or indirectly are: Oil and Gas, Automobiles, Aviation, Paints and adhesives, Plastics.
1. Oil and Gas
A rise in crude oil prices is a blessing in disguise for upstream companies like ONGC, Oil India because they tend to have a positive correlation with oil prices, whereas for downstream companies like HPCL, BPCL its a difficult pill to swallow due to their inverse relation. Rise in input costs will impact the operating earnings of downstream companies, and hence margins. However, for the upstream companies its contrary; enhancement in operating performance, reflected via margin expansion. So, if you are a shareholder or thinking of becoming one, then keep in mind these parameters before investing.
2. Automobile Sector
Let’s go back to school economics to understand the effect of crude prices on automobile sector. Vehicles and petrol/diesel are complimentary goods, so there exists a direct correlation between the quantity of one and price of the other. Resultantly, rise in crude prices negatively impact the automobile demand, thus adversely affecting the sales of automobile companies and their stock prices.
(Fact: WTI Crude fell 47% in 2014, whereas BSE auto index climbed 51% during the same period.)
Fuel constitutes nearly 30% of an airline cost, second only to labor costs. As a result, any change in crude prices will directly impact the airline’s bottom line. Although, the option of hedging is available, most of the airline companies refrain from it to enjoy any fall in crude prices. Thus, there exists a contrary relationship between crude prices and airline’s stock price.
(Fact: WTI Crude fell 30% in 2015, whereas InterGlobe Aviation’s stock surged 44% during the same period.)
4. Paints and adhesives
Companies involved in the business of paints and adhesives also fear from the rise in crude prices. Around 60% of raw material for paint industry is based on oil derivatives. Thus, any increase in crude prices shrinks their margins. Nevertheless, companies having powerful moat and strong brand are able to pass on the extra cost to the customers. Vinyl acetate monomer, a crude derivative which is extensively used in adhesive business, forms more than 1/3rd of the adhesive’s raw material and has the same effect as the paint industry. Therefore, rising crude prices is a bane for paints and adhesive industry.
Plastics, a type of polymer is made by refining crude oil into petroleum based products. As such, companies like Nilkamal, Supreme Industries go through a tough time when there is a spike in the price of crude oil because cost of making plastic furnitures goes up. Inability to pass on the extra cost to the customers could see these companies taking the brunt on themselves, and ultimately undermining the margin performance. That said, stock prices of these companies also take a beating in short- medium term
Although this may not be an exhaustive list of industries getting affected by oil prices, yet it blankets all the sectors that are affected the most. Moreover, any scrip you see on the bourses is directly or indirectly affected by crude prices. Hence, it becomes crucial to gauge the impact of crude prices on your portfolio.
Do share with your near ones if they are holding any oil sensitive company in their portfolio or are planning to!