Brent crude prices are surging, WTI is surging. We have a formula here which has shielded us for six months as far as natural gas prices go. How are you reading this and what impact is it likely to have on India and of course the oil and gas stocks?
We have another six months window from April to October next year or April to September next year and thereafter the prices would be in two tranches and should that be the case which is almost a reality. In the process, we have two segments to look at.
On one side, there are the upstream companies which are benefiting from higher prices.They would largely benefit from every one dollar increase. They would see between 15% and 30% upside in their books as far as earnings are concerned.
On the other side is the consumer segment. The people distributing the gas are likely to face the heat if the gas prices go up and along with that, other fuel prices also start going up. It would prove challenging for the global economy. That is where one could see a threat of some sort of a demand cooling down in the global economy.
These are the two dynamics on which we are sitting currently. It is difficult to predict which way the companies will be pricing their gas and how much they will absorb. One will have to be realistic and the fact is distribution companies are likely to be a little bit harder hit as far as the price rise is concerned. We will have to be a little bit more watchful on that front now onwards.
Even companies like IOC are buying LNG cargoes at $26 a unit. That is a far cry from the recent price hike that we have seen for natural gas in India. It has already started seeing the impact on companies like IOC and therefore it will have to have a pass on effect on fertilisers, steel. Is there an opportunity here?
Once they start passing on the cost to the user industries, these companies will have no choice but to pass on the cost to the consumers and I think this is going to be a chain impact. Generally with higher costs, demand cools down. A typical case in point are the power companies. A sharp rise in coal prices has hit those power producers who are dependent on imported coal. In the last one month, they have refrained from booking coal and as a result, their production capacities have come down by almost around 10% in some cases.
This kind of a situation could play a very significant role in the economic engine because if the user industry cannot absorb and the consumers cannot absorb the price, it is quite possible that the commodity prices will cool down. As of now, this has not been seen. I think the price rise may be transitory and could cool down eventually.
Do you think the market this time is going into the quarterly numbers with heightened expectations? Are the second quarter commentaries from HDFC Bank or Federal Bank is indicative of a very strong second quarter?
I definitely think that the demand scenario has been extremely buoyant and the companies are likely to take the maximum advantage in producing good numbers. The particular demand scenario is likely to remain good in the second half of the financial year as well. However, most of the companies which are likely to make robust profits even in this quarter, are likely to start feeling the heat of higher raw material prices in subsequent quarters. Already some of the commodity companies have been complaining that they have not been getting the ship liners and as a result, their supply chain logistics have got affected.
Some of the chemical companies have got hurt because of loss of production due to heavy rains in some parts. We are also experiencing the cost of raw material shooting up dramatically and waiting for a higher cost structure for most of these companies. So it may not get completely reflected in the September quarter but in subsequent quarters, when higher raw material costs get absorbed into the books, we are likely to see pressure on the margins.
However, consumer demand remains extremely strong, largely because of higher growth in the rural, agriculture, infrastructure and the industrial sectors. Many companies are putting across significant amounts of investment in brownfield as well as in greenfield projects. So from that point of view, we are likely to see the demand scenario remaining buoyant but the pricing pressure would hurt the margins going forward.
