Crude @ July 2022 High: Every $10 rise eats into tyre & paint margins | Risk math explained

Crude oil benchmarks have surged for a third straight day amid rising tensions in the Middle East, with the US admitting for the first time in the ongoing conflict that Israel acted without taking it into confidence in their joint operation against Tehran. Brent surged 4.0 per cent to settle at $111.7 a barrel -- its highest close since July 2022 -- while WTI rose 1.0 per cent to $96.4 a barrel, with Brent taking its rally to 11.6 per cent in three straight sessions. Market guru Anil Singhvi predicted a fall in aviation, OMC and metal stocks as he decoded key signals ahead of Thursday's opening bell on Dalal Street.

What crude oil spells for paint & tyres

Zee Business Managing Editor Singhvi also pointed out that the stocks that have risen sharply in the recent past may sustain losses now.

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Minutes into the opening bell, IOC was down 2.6 per cent, HPCL down 5.6 per cent and BPCL down 3.8 per cent. In the paintmakers' basket, Berger, Akzo Nobel, Kansai Nerolac, IndiGo Paints, Shalimar Paints, Asian Paints and Sirca Paints were trading with losses of 1.2.6 per cent -- in line with what the market wizard had predicted. Among tyre stocks, JK Tyre & Industries, CEAT, TVS Srichakra, MRF, Apollo Tyres and Balkrishna were down around 1-3 per cent each.

The sharp spike in crude oil prices can extend to as high as $120 a barrel in the current bout of strength, said Singhvi.

Rising crude oil prices are negative for tyre and paint manufacturers, which heavily depend on inputs like petroleum derivatives, say analysts.

The exposure of tyre companies and paintmakers to these raw materials is estimated to be up to 40 per cent and 55 per cent, respectively, according to Zee Business research.

Tyre companies are more sensitive to crude oil spikes, with every $10/barrel rise denting their margins by an estimated 110 basis points (bps).

The latest rally in crude oil may even reverse earlier tailwinds to the tune of 600-1,000 bps to their margins, according to the research.

Crude Oil Surge | How CLSA views tyre makers

Foreign brokerage CLSA has flagged an estimated 400-basis-point hit in tyre gross margins with a 25-40 per cent earnings per share (EPS) downgrade risk by FY27.

HSBC has pointed out that paintmakers' raw material costs are set to rise after four years, while intense competition may limit the ability to pass on price hikes.

Here's how analysts are linking the costlier crude oil barrel to these businesses:

Tyre companies

• Every $10 increase in the crude oil benchmark reduces margins by about 110 bps
• Earlier, stable crude prices had led to a margin expansion of 600-1,000 bps
• CLSA:
  • Margins for tyre companies are set to peak out now
  • Geopolitical tensions are pushing up raw material costs
  • Gross margins could be impacted by around 400 bps in FY27 owing to higher prices
  • EPS may decline by 25-40 per cent in FY27

Paint companies

• Every $10 rise in crude impacts gross margins by 50-60 bps
• EBITDA margins could decline by 20-30 bps
• HSBC:
  • Raw material prices have surged after four years
  • Price hikes may narrow the volume-value gap
  • Rising competition in the industry makes price increases difficult