Crude prices have taken a beating by relentless anxiety about oversupply and waning global demand. Tyre and paint companies are collateral beneficiaries of the decline in crude prices as a large part of their raw materials consists of oil coordinates.
Although Berger Paints has been carrying some inventory, company MD Abhijit Roy sees softening in raw material prices hereon. However, not all crude derivative inputs are beneficiaries of fall in crude prices, he says in an interview with CNBC-TV18’s Latha Venkatesh and Reema Tendulkar.
Gains from crude price plunge will be seen in Q3 as Q2 will only benefit marginally from the drop, Roy adds.
Below is the verbatim transcript of the interview:
Q: What does a 10 percent fall in crude prices mean to you in terms of raw material prices as well as margins?
A: There will be some softening in the raw material prices. It has started dropping already. However, we were carrying some amount of inventory with us. Therefore, the benefit will be there but more towards the end of the quarter.
Q: End of the quarter as in should we be expecting it in Q3?
A: That is right. We will get more of it in Q3 but we will have some positives in Q2 also.
Q: Can you give us something in terms of a percentage gain, in terms of lower raw material cost or in terms of percentage improvement in your margins?
A: It will be relatively significant. I would say more towards improvement of margin of about 0.6 to 0.1 percent.
Q: You have seen a 20 percent fall in crude prices from the highs that prevailed in June. Therefore do you think that the benefit could be even more as you get into the Q4 and as you clean out your inventories?
A: What is happening is crude derivatives which are there they don’t depend only on the crude prices. It is also a demand supply situation, which determines the prices. For example, the emulsions that are there, two of the emulsions dropped prices but one of them went up a little bit.
It is also contingent on what the supply is and what the demand is for particular derivatives of crude. So, it is not directly linked. Those that are directly linked like MTO, etc there the impact will be felt much more. However, in such cases where it is not there, it will depend on how the demand and the supply situation is.
Q: We had an analyst telling us that a 10 percent drop in crude prices will up your earnings per share (EPS) for the full year by 37 percent, is that a fair estimate?
A: I haven't done that calculation, I can't tell you but it looks slightly on the higher side definitely.
Q: Would you look to pass on the benefits on the back of the decline in crude to your clients? Will you look to cut prices?
A: You are right that there is some benefit. It will depend whether we need to cut prices. If the benefit becomes too large, maybe we will have to do that but as of now, that is not the situation.
Q: Even in Q3 when you actually get the benefit?
A: It will depend, lot of times the dollar starts moving up, you don't know how that will pan out because if it is imported good. If the dollar starts appreciating against the rupee then whole benefit that is anticipated will get negated. So we will have to wait and see how that happens and how it moves.
Q: The analysts are making that calculation because dollar-rupee has remained largely at par so if the dollar has appreciated, the rupee has also appreciated.
A: True but then what is happening also is that in the United States it is expected that it there will be tightening and once that happens the dollar might appreciate which is why the market is dropping also to some extent.
Q: You would still think that compared to your analysis when the crude price was at USD 105 per barrel, at this point in time your profit could easily jump by about 20 percent?
A: I haven’t done that calculation. I won’t be able to tell you exactly and therefore I would not like to conjecture at this point of time.
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