Brent crude’s sharp rise during the September quarter is emerging as an important factor for Q2 earnings. The global benchmark stood at around $70.14 a barrel on July 2nd, but had climbed to about $110 a barrel a couple of days ago, which is around 57 percent rise. Brent crude’s futures has dropped to $98 per barrel falling close to 5 percent today
Although rising costs of crude could increase material costs for paint manufacturers, oil marketing companies will have to worry about a different set of calculations related to fuel pricing and refining margins. The second quarter results, therefore, will be watched carefully by investors in terms of the impact of high crude.
Paint Stocks: Higher Crude Could Put Q2 Margins Under Pressure
Brent crude prices have gone up significantly from about $70.14 per barrel on July 2nd to $110 per barrel recently, thereby raising fears regarding the expense of crude-based inputs for paint manufacturers. According to ICICI Direct, crude and crude-based derivatives make up about 20-25% of the total input costs of paint firms. ICICI Direct pointed out that paint firms have hiked their prices by 13-14%, but it might not be enough to counterbalance the effect of higher crude and other commodity prices.
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The critical factor with Q2 is whether firms would be able to pass on this cost inflation through price increases. Should the costs of raw materials rise more quickly than sales prices the gross and EBITDA margins may face pressures. It can also show up after some delay as firms have inventories at previous costs.
The influence will also differ among firms, as not all commodities are tied up with oil. For instance, titanium dioxide will have its own drivers of prices, whereas monomers, polymers and additives are exposed to crude to a different degree. That is why the results for Q2 and management’s views on the matter will be crucial.
OMC Stocks: Higher Crude Creates a Mixed Q2 Earnings Impact
In the case of oil marketing companies like IOC, BPCL and HPCL, the effect of increased prices of crude will be more complex. Unlike paint companies, the performance of OMCs will depend on the interplay of several factors including crude prices, margins in petrol and diesel marketing, refining margins, etc.
A sudden jump in the price of Brent to levels above $100 could put marketing margins under pressure in case of an absence of rise in retail prices of petrol and diesel. This will mean increased cost of crude oil but unchanged prices for fuels, especially in the last part of the quarter.
However this does not necessarily imply that the Q2 earnings would be impacted in the same way. The crude was significantly lower at the start of the quarter, which could offer some protection. There are also refining margins and inventory gains that could offset marketing profitability weakness.
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Conclusion
In any case, the jump in the price of Brent crude from $70.14 to approximately $110 a couple of days ago presents a different set of Q2 risks for the two sectors. The paints sector may experience margin pressure due to rising costs of inputs tied to oil prices, while OMCs may experience reduced marketing margins although they would benefit from stronger refining margins.