Sharp fuel price hike to hit businesses already grappling with pandemic impact

Petrol prices breached the Rs 100 mark in Mumbai on May 29 following a Rs 0.25 hike.

They were last raised two days ago on May 27.

As of June 2, the price of petrol remained above the Rs 100-mark in Mumbai and stood at Rs 94.49 per litre in the national capital.

The steep hike in fuel prices over the past few weeks has brought in new worries for companies already battling the issue of poor demand amidst the second wave of COVID-19 and lockdown-like restrictions.

Across the sectors, this hike would lead to an increase in freight costs and transportation expenses. This is likely to be passed on to customers in the form of a cost increase in the final products.

Oil Marketing Companies (OMCs) in India have raised petrol prices by 28-29 paise/litre and diesel prices by 26-28 paise/litre on May 31.

Since May 3, fuel prices have cumulatively jumped by Rs 3.83/litre for petrol and Rs 4.42/litre for diesel after a series of consecutive price hikes over the month.

White goods may feel price pinch

In the appliances industry, which is dependent on the logistics and transportation to move raw materials and finished goods from one place to another, oil price fluctuations impact businesses.

The appliance industry is estimated to be Rs 85,000 crore of which domestic manufacturing accounts for about Rs 35,000 crore.

Since COVID-19 in April 2020, the industry has been hit with multiple issues ranging from raw material cost rise, component supply constraints as well as global shortages of products like semiconductors.

Adding to their woes is the current fuel price escalation. Logistics accounts for around 15-18 percent of the final price of the finished goods.

So, any rise in fuel costs has an impact on the overall price of the product. Industry sources said that there could be 3-5 percent rise in prices if this fuel-cost situation remains unchanged till July.

"First raw material prices spiked about 350 percent. Now the fuel price is impacting last mile warehouse delivery. Customers might feel the extra pinch due to fuel hike as this would certainly lead to price rise," predicts Avneet Singh Marwah, CEO SPPL.

SPPL is the exclusive brand licensee of Thomson TVs and Kodak TVs in India.

Moneycontrol had reported earlier how 2020 was the worst year for the white goods industry in India with product segments like televisions and air conditioners being the worst hit.

Even in 2021, there have been price increases due to a rise in component prices, especially TV panels that are imported from China.

Kamal Nandi, Business Head and Executive Vice President-Godrej Appliances says that if commodity prices harden further, it will affect the cost of appliances.

"The logistics side of the business will have some impact in terms of the cost. It is a wait-and-watch right now. Component manufacturing costs will also be impacted,” he adds.

According to the India Strategy Report of Motilal Oswal Financial Service, global commodity prices have seen a surge in 2021 with the CoreCommodity CRB index rising 70 percent on a year-on-year basis in April 2021.

The report also forecasted that sectors like consumer durables will be impacted by the price rise.

Cost concerns for pharma sector

High crude oil prices may not be good news for the pharmaceutical industry either. Hardening of oil prices will lead to higher input costs.

"Like other industries, pharma uses petrochemicals for both raw materials and energy to run boilers, so those costs will go up," says Ashok Kumar Madan, Executive Director of Indian Drug Manufacturers Association (IDMA).

India imports about 60-70 percent of its APIs (active pharmaceutical ingredient) and intermediates from China, many of which are based on petrochemical raw materials.

In addition, Madan points out that there will be some impact on the freight rates. "Freight rates have already risen 25-40 percent in the last one year, due to the COVID-19 pandemic," he says.

Freight is a very small element; about 1 and 1.5 percent of the overall costs.

Madan states that they haven't done any study to assess specific impact of oil price hikes on the pharma industry.

FMCG industry eyes tweaks

The rise in freight costs has made it challenging for fast-moving-consumer goods (FMCG) companies to operate in a scenario when they are already witnessing sustained inflation of several key raw materials.

Of late, FMCG companies such as Marico, Britannia, HUL, and Emami have hiked the prices of their products.

Hence, firms are looking at ways to offset increased costs on account of freight.

Says Amit Kumat, MD & CEO at Prataap Snacks: "Our widespread distribution network spans to the far ends of the country with presence in over 27 states and three Union territories. Freight cost is a significant component of the overall distribution cost. An increase in fuel price over the duration of the year has adversely impacted the business."

Prices vary across states depending on local taxation like value-added tax (VAT) and factors such as freight charges.

Rajasthan reportedly levies the highest VAT on petrol in the country, followed by Madhya Pradesh and Maharashtra.

While passing on the cost increase is an option, the FMCG industry is keen to look at cost optimisation measures to deal with the situation.

According to Kumat, the company has been able to mitigate this by taking various cost optimisation measures.

He adds that they have established manufacturing facilities close to significant markets to enable faster replenishment of products at customer touchpoints.

Kumat explains that an efficient distribution system has helped in conserving capital and lowering cost without constraining capacity.

Besides this, the rising price of crude derivatives such as liquid paraffin (LLP) and high-density polyethylene (HDPE), up by 29 percent and 31 percent year-on-year (YoY) respectively in the fourth quarter, have directly impacted detergent makers as it is a key raw material for them.

Jyothy Labs has witnessed a 6 percent rise in key raw material costs and has passed some of it to the consumers. HUL, which has detergent brands such as Surf Excel and Rin in its portfolio, has raised its prices by 5 percent.

Auto may see minimal impact

While there was a jump of Rs 4.10 in the price of diesel per litre during May 2021, truckers claimed to have absorbed the hike due to subdued demand.

Demand at present is only 40-50 percent of the optimal level with fleet utilisation having nosedived to 35-40 percent leading to a crumbling truck transport business, the India Foundation of Transport Research and Training said.

Truck rentals have, in fact, fallen by an average of 5-8 percent on major routes such as Delhi-Mumbai-Delhi and Delhi-Chennai-Delhi.

Helped by a buoyant harvesting season, 10-15 percent extra arrival of fruits and vegetables at agricultural produce market committee (APMCs) and mandis have been negated by a low manufacturing output due the lockdowns.

When it comes to the sale of automobile products, industry insiders are of the view that green shoots are visible.

India is also said to be seeing a trend of 'revenge buying' in some aspirational product segments like appliances, electronics and automobiles. Revenge buying refers to a phenomenon where a customer aggressively shops for products after a period of forced lockdown as seen during COVID-19.

“The general anxiety towards COVID-19 has made consumers believe more in aspiration than before. This is the reason why there is a continued spike in bookings of new cars despite fuel prices touching new highs every day. Because bank lending rates are low, affordability has remained high. A person who can pay Rs 96 for a litre of petrol won’t be discouraged from paying Rs 10 more for it; yes, he may take out his vehicle less often”, said a sales head of one of India’s top five automakers.

Central and state taxes make up for 60 percent of the retail selling price of petrol and over 54 percent of diesel.

The state-run oil marketing companies (OMCs) – Indian Oil Corporation, Bharat Petroleum and Hindustan Petroleum – decide the rates of domestic fuel against global crude oil prices by considering changes in foreign exchange rates.