4 Companies that Could Lose Big as Crude Oil Prices Head Higher. Should You Exit?

Crude oil prices hit a 14-year high in 2022, almost touching US$140 a barrel in March on the back of war and trade related disruptions.

The rally started in January, following which rates crossed US$100 per barrel across the world as the war between Russia and Ukraine escalated.

While the prices have receded since then and are now around US$105 per barrel, a rising dollar and the Covid-19 situation in China could spell more uncertainty for the commodity.

Rising crude oil prices stand to impact not only the oil and gas industry but also other industries that use crude oil and its derivatives such as paints, chemicals, and aviation.

Here are four companies that could lose big as crude oil prices head higher.

#1 Asian Paints

First on our list is Asian Paints, the largest paint manufacturer in India.

The rise in crude prices will lead to rise in input costs for the company as crude oil and its derivatives form a large part of its raw material costs.

This in turn has the potential to impact the company's margins.

While the group has the flexibility and pricing power to pass on the rise in input prices in the domestic decorative business, this is limited in the industrial paints segment.

The profitability in the segment is susceptible to volatility in raw material prices such as titanium dioxide and crude-based derivatives, that comprise a majority of the total raw material cost.

The adverse impact of the sharp rise in crude oil can already be seen over the last couple of months.

The company's consolidated net profit tanked 18% YoY in the December 2021 quarter for the second consecutive quarter, even as it reported a 25.6% YoY rise in revenue.

With price hikes being taken, the impact is expected to reduce over the medium term and operating profitability is expected to improve.

However, the extent of that is unknown as the company has already hiked prices by about 20% in the last year.

The rise in crude oil prices has also impacted the company's share price. The stock is down 8.1% in 2022.

#2 Interglobe Aviation (Indigo Airlines)

Second on the list is Interglobe Aviation, the company that runs India's largest airline, Indigo.

High crude oil prices are a major challenge for the company since it forms over 40% of its total expenses. The company uses Aviation Turbine Fuel (ATF) which is derived from crude oil.

High crude oil prices and poor demand have already had an impact on the company's margins and profitability in the last couple of months.

In the June 2021 and September 2021 quarter results, Indigo reported a loss of over 30 bn and Rs 15 bn respectively.

While this improved in the December 2021 quarter, any further increase in crude oil prices could impact the profitability of the company.

Airlines generally pass on the fuel costs to the customer. However, the ability to pass on rising fuel costs could diminish if the recovery led by pent-up demand loses momentum, putting pressure on the already-stressed airline balance sheets.

In an interview earlier this month, Ronojoy Dutta, CEO of the airline said -

• The general perception is that we can simply pass through the cost of higher fuel by charging more from the customer.
  
  The truth, however, is that as we raise fares fewer people choose to travel, so beyond a certain point higher ticket prices actually result in a decline of revenues.

Another factor is the intense competition. Peers including Air India, Vistara, and Air Asia have increased capacity amid rising demand.

As a result, the company's market share has fallen to 51% in February 2022.

While shares of the company have shown resilience compared to its peers, the stock is still down 10.9% in 2022.

#3 Alkyl Amines

Third on the list is Alkyl Amines, one of the leading manufacturers of aliphatic amines in the country.

The company is a market leader in the ethylamine segment and is among the foremost manufactures of methylamine, diethyl hydroxylamine, and dimethylamine hydrochloride (DMA HCL) in India.

It also has a significant presence in the international market for its reliable service and quality products.

The commodity nature of the company's products makes it susceptible to fluctuations in raw material prices especially crude oil.

In the last couple of months, the company has witnessed a spike in input costs due to supply chain issues and high freight costs which put immense pressure on its margins.

As a result, the company's operating profit margin declined for three consecutive quarters. It reported an operating profit margin of 21.6% in the September 2021 quarter - its lowest ever.

To offset the increase, the company has taken price hikes by entering into contracts with customers, which are formula-based and quarter-based.

However, as crude oil prices go higher, this may get tougher to implement as it will result in inflationary pressures on all fronts.

Shares of Alkyl Amines are down 16.9% in 2022.

#4 Castrol

Last on the list is Castrol, the Indian subsidiary of Castrol UK.

The company is the second largest manufacturer of automotive and industrial lubricants in India. It has a market share of around 20% in the Indian lubricant market.

The company is a purchaser of base oil which forms the largest portion of its operating expenses. The price of base oil generally fluctuates in line with crude oil.

While it manages the price risk through operating procedures and sourcing policies, it has not entered into any commodity derivative contracts leaving it vulnerable to any spikes in the price of crude oil.

For the last three quarters, the company's margins have fallen below 25% marked by an unprecedented rise in input costs and supply chain disruptions.

During the December 2021 quarter, despite higher realisations, Castrol's operating profit also fell 10% sequentially.

The company has carried out timely pricing interventions to tackle this increase and has launched new products with the latest BS-VI ready technology for cars, and commercial vehicles.

However, any dip in demand could impact the company's margins and ability to pass on any further increase in input costs to customers.

Shares of Castrol are down 15% in 2022.

Will Crude Oil Prices Head Higher?

According to the World Bank, commodity prices are expected to remain well above the most recent five-year average.

In the event of a prolonged war, or additional sanctions on Russia, prices could be even higher and more volatile than currently projected.

However, currently, crude oil prices are trading in a range after dropping sharply last week.

The market is torn between supply and demand concerns over Russian oil and gas disruption and a worsening global economic outlook.

China's intense Covid-19 related lockdowns and the US Federal Reserve's aggressive rate hike stance is also weighing on demand sentiment.

How the price of crude oil moves in the near term remains to be seen. Stay tuned for more updates from this space.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...