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Over the last two sessions, oil prices have seen a sharp decline, with falling around 10% to US$78 per barrel, by yesterday. There have been many factors contributing to escalating fear among investors in the oil market, one of which is the Covid-19 situation in China which seems to be worsening day by day as recent images show people are forced to burn dead bodies on the street due to overburdened crematoriums.
Nonetheless, falling oil prices are any day a good thing for the Indian economy as we import more than 80% of our requirement. All oil-dependent sectors would significantly benefit from these lower oil prices, the result of which would be seen in the next quarterly earnings. Here are 2 of those benefitting sectors that you need to keep a tab on.
Oil Marketing Companies (OMCs)
Oil Marketing Companies such as Indian Oil Corporation (NS:), Bharat Petroleum Corp. Ltd. (NS:) and Hindustan Petroleum Corporation Ltd (NS:) are bound to gain significantly due to suppressed oil rates, which is already evident in their share price rally in the last few weeks. Lower oil prices would help in both the segments – refining and marketing.
Their marketing business would get additional headroom as despite fallen oil prices they haven’t reduced the retail prices which would be reflected in their profit margins. In the previous two quarters, these OMCs reported a net loss as the government capped the retail prices while oil prices went up, to curb inflationary pressures in the economy. But the second half of FY23 would relatively be much better.
Airline Industry
Airlines such as Interglobe Aviation Ltd (NS:), Spicejet Ltd (BO:), etc. are a no-brainer when it comes to the direct beneficiaries of falling oil prices. ATF (air turbine fuel) is a major cost component for an airline which could be as high as 40% of the total operating cost. ATF cost is directly linked to crude oil prices and is revised every 15 days by the government, hence, lower oil prices would immensely improve the profitability of airlines.
Indigo has been reporting losses for the last three fiscal years, however, its net margins improved in FY22 to -23.12%, from -37.04% a year ago. The margins in 1H FY23 have further improved to -10.24%. Recently the government slashed ATF prices by 8% to INR 1,08,138/Kilolitre (in Delhi) which is the lowest level after March 2022, which is expected to continue the ongoing improvement in their margins.
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