Cheaper raw materials to boost India Inc nos

India Inc can breathe easy. With prices of key raw materials such as palm oil, crude oil, coal and rubber coming down sharply in the global market over the past few months, the bottom lines of companies are all set to improve. Most raw material prices have cooled off in the second quarter of the current fiscal, which would result in an improvement in gross profit margins, market observers said.
Palm oil prices have fallen by over 13% in July-September in dollar terms, translating into higher profit margins for FMCG (fast-moving consumer goods) companies and potentially lower prices for consumers. Palm oil derivative is a key ingredient in soap making. Palm oil accounts for about 16% of the cost of goods sold for FMCG major Hindustan Unilever and around 20% for Godrej Consumer Products. Lower prices would result in a cost saving of 1.8-2.5%.
It is not just the FMCG industry that is cheering lower costs. Tyre makers and automobile manufacturers would benefit from the decline in natural rubber and crude oil prices. While global natural rubber prices have fallen by 15% in the last three months, brent crude prices have decreased by more than 23% during the period.
"They (lower commodity prices) are enablers for a turnaround. Market sentiments would improve if crude prices stay low," says P Balendran, VP, General Motors India. "The market has started seeing some green shoots. Going forward, we are expecting an improvement in sales," he adds.
G Chokkalingam, founder and managing director (MD), Equinomics Research and Advisory, says, "Indian companies would be net gainers as they are large importers of these commodities." The fall in crude prices is a double bounty for tyre makers as petroleum-based products account for around 60% of the raw material used in the tyre industry.
Raghupati Singhania, chairman and MD, JK Tyre, says, "Rubber manufacturing hubs like Thailand and Indonesia are trying to control the price drop and in India, too, pressure is building from rubber growers. But I don't think prices will rise in a big way because China is a big factor in that." China, which consumes 50% of the world's rubber production, has been facing weak demand. "So, rubber prices may not go up very much," Singhania says.
Lower crude prices would also help paint producers such as Asian Paints as crude-linked products account for nearly 26% of the cost of goods sold.
Power and steel producers, which have been hit by the recent Supreme Court ruling that cancelled all but four coal blocks allocated between 1993 and 2010, have reasons to smile as international coal prices continue to decline. Indonesian coal prices have dropped by more than 5% in the last three months and have declined by about 15% so far this year.
Despite the decline in global prices, coal prices in the international market are still more than double that of rates prevailing in the domestic market. Iron and steel, power and aluminum makers produced 39 million tonnes (mt) of coal per annum from 40 blocks commissioned as of 2013-14. India imported 171 mt of coal valued at $16.4 billion in 2013-14 and 145mt valued at $17 billion in the previous fiscal.
(With inputs from Nandini Sengupta)