OPEC move to hold output augurs well for Indian economy

With OPEC, a group of 12 oil producing nations, deciding to refrain from lowering output, crude oil prices have crashed 40% from June 2014 levels.

The move augurs well for the Indian economy as it imports nearly 80% of its crude. It’s also expected to improve profitability of companies which use crude oil or its derivatives as their raw materials.

According to a Nomura broker, with every $10/bbl decline in oil prices, India’s GDP will edge up 0.1% and lower the wholesale price index by 0.5%. It will also reduce the fiscal deficit by 0.1% and the current account deficit by 0.5% of GDP.

Profitability of oil-marketing companies like HPCL, BPCL and IOC will improve as dependence on subsidy will be less. This will bring down working capital loans and also better marketing margins of these companies.

Auto companies, too, stand to benefit. Historically, lower cost of vehicle ownership leads to higher volume growth. The Street is betting that Maruti Suzuki is best placed to reap the benefit of a lower fuel price.

Lubricant makers like Castrol India, Gulf Oil, Savita and Apar Industries will gain as raw material cost accounts for nearly 60-65% of sales and is linked to crude oil prices. But since lube is mostly a retail item, a drop in raw material costs is often not passed on to consumers.



Similarly, paints companies, where crude oil and its derivatives constitute about 30-40% of their total raw material costs, will reap dividends.