Earnings recovery seen starting in FY18, but rising oil prices may affect margins

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Mumbai: Even as analysts and fund managers expect corporate earnings to recover later this year, rising crude oil prices could bite into the margins of some companies.

Analysts expect the much-awaited earnings recovery to begin with the earnings for fiscal year 2018 and improve over fiscal 2019. Kotak Institutional Equities said in a note on 8 December that it expects 23% growth in net profit of Nifty firms in fiscal 2019 and 17% in fiscal 2020, led by better operating conditions in many sectors such as banking, pharmaceuticals and telecom, which had deteriorated sharply over fiscal years 2016-18. However, rising oil prices may cast a shadow on some of these expectations, particularly on margins, according to analysts.

Crude oil prices hit a fresh three-year high and rose past the psychologically important $70-a-barrel mark on Tuesday. They have been on an uptrend due to oil production curbs by Opec and Russia, and have also been supported by robust demand on the back of improving global economic growth.

On Monday, Brent crude prices hit $70.26 per barrel, a level last seen on 2 December 2014. It has jumped 54.60% since 21 June last year.

The Indian economy, Asia’s third largest, faces the brunt of rising crude prices as the country imports around 80% of its crude oil requirements.

“India is the most impacted country in G-20 due to rise in crude oil prices. Our oil intensity is higher than any other country in the pack ,” said Ritesh Jain, chief investment officer of BNP Paribas Asset Management India Pvt. Ltd.

“If (the oil price hike) it is not passed on by oil marketing companies, and it will hurt our fiscal deficit because consumption will not come down,” said Jain.

Those consumer companies, whose input prices, specifically for oil and oil derivatives, are market-linked, may see their margins being hurt, starting June quarter of this year, Jain said.

Profit margins of companies which have crude and crude derivatives as their significant raw material components, the prices of which are linked to the market price, could see some contraction. For airline companies, rising jet fuel costs could start exerting pressure on their operating margins. Industries such as tyre manufacturing and paint producers, may also face downside risks to their margins, if the price of crude oil stays on the higher end or rises further.

“Some impact on earnings from high oil price may happen in the March quarter,” said Dhananjay Sinha, head of research at Emkay Global Financial Services Ltd.

“Certain segments will see the impact, such as cost being pushed, and margins coming down,” added Sinha.livemint