Fuel Price Hike Triggers Cost Pressures Across Indian Industry, Cement Sector Most Vulnerable

Fuel Price Hike Exacerbates "Perfect Storm" for Indian Companies

The recent fuel price revision in India, amidst the ongoing West Asia war, is expected to further escalate costs for various sectors, intensifying a "perfect storm" for companies already grappling with elevated raw material prices and supply chain pressures.

On May 15, the government authorized state-run oil marketing companies to increase the retail prices of petrol and diesel by Rs 3 a litre, representing an average 3.2 percent to 3.4 percent rise. This marks the first fuel price hike in nearly four years, aimed at reducing the ballooning current account deficit (CAD) and easing severe financial strain on state-run oil marketing companies, which have been incurring massive under-recoveries and losses of nearly Rs 1,000 crore per day.

The cement sector is likely to feel the most pain from the hike, as 70 percent of cement in India is still moved via commercial trucks and roads due to poor last-mile rail connectivity to local dealer warehouses. Transportation accounts for up to 40 percent of the total cement production cost, making it a significant expense for cement producers.

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Analysts expect cement and metal firms to report margin erosion in the ongoing quarter, as well as the following quarter, owing to an above-normal increase in key inputs, especially energy, such as coking coal, petcoke, and thermal coal.

Cement firms are also expected to face hits on their margins due to an increase in the costs of packaging material, especially polypropylene bags, which is derived from crude oil refining.

Going forward, analysts expect cement makers to shift long-haul transportation to rail networks, given the cost advantage over road transport. Moving one tonne of cement over 500 km costs around Rs 800-1,000 by road, compared with nearly Rs 450 through rail.

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The paint sector is expected to have a limited impact from the hike, as freight cost for most paint companies is around 5-6 percent of revenue.

FMCG companies, which typically spend nearly 10 percent of their revenue on transportation and logistics, may see downtrading by consumers as the impact of the hike manifests in the form of rising costs.

“A perfect storm is brewing, with inflation on one side and cost escalation on the other. So, the customer will start to trade down," said Anand Ramanathan, partner and consumer industry leader, South Asia at Deloitte.

The industry has already been witnessing elevated input costs over the past few months, particularly in packaging materials and certain ingredients, which have had an impact on margins. Any further increase in fuel prices could lead to a cascading effect across logistics and other operating costs, potentially adding another 5-7 percent pressure on overall input expenses.

Dabur India, the maker of Hajmola candies and Real fruit juices, has already indicated the possibility of a second round of price increases to offset the impact of the ongoing war-related disruptions.

Barclays expects the fuel price hike to add nearly 8 basis points to headline inflation in May.