Crude Oil Explained: Impact on Aviation, Paints, Tyres, FMCG and the Rupee

Hello, my name is CA Sandeep Kumar, and today’s topic is Crude Oil and Company Fundamentals.

Today, we will understand how movements in crude oil prices impact company earnings, margins and stock prices.

We will cover how crude oil prices move, their impact on aviation, paints, tyres, logistics, chemicals and FMCG sectors, the impact of crude oil on inflation, the rupee and government finances, pass-through ability, sectors that benefit when crude oil prices fall, and sectors that come under pressure when crude oil prices rise.

So, let’s begin. 

Many investors associate crude oil only with petrol and diesel prices. But for an investor, crude oil is much more important than that.  Crude oil is one of the most important macroeconomic variables in the economy. Its movement directly and indirectly impacts the earnings, margins, cash flows and valuations of hundreds of listed companies.  That is why successful investors do not look at crude oil merely as a commodity. They look at it as an earnings driver. 

So, why does crude oil matter? Crude oil is not just fuel. It impacts company costs, inflation, the rupee and government finances. This is why investors closely track crude oil prices.  When crude oil prices move, company earnings can also be affected. You can understand this relationship as a chain.  When crude oil prices move, the cost structure of a company changes. This can affect margins, which in turn affects earnings, and ultimately, stock prices.  As an investor, understanding this relationship is very important. 

Direct Impact of Crude Oil 

Now, the question is: how does crude oil impact company earnings? 

Broadly, there are two ways: direct impact and indirect impact. 

Let us first discuss the direct impact. 

In this case, crude oil or crude oil derivatives are direct inputs in a company’s production process. Examples include airlines, paint companies, tyre manufacturers and chemical businesses. 

The relationship is simple. If crude oil prices rise, input costs increase. This can put pressure on margins and reduce profits. 

If crude oil prices rise, the raw material or fuel costs of these companies also increase. Even if revenue remains stable, profitability can decline sharply because margins come under pressure. 

This is why experienced investors do not look only at revenue growth. They closely track margin trends because margins often tell the real story. 

Indirect Impact of Crude Oil 

Now, let us look at the indirect impact.  Not every company uses crude oil as a direct raw material. However, that does not mean crude oil prices do not affect them. Many businesses are affected through transportation and distribution costs. Examples include FMCG companies, cement companies and consumer goods businesses. 

The impact works like this:  When crude oil prices rise, diesel costs can rise. This increases freight and distribution costs, which can put pressure on company margins. The raw material costs of these companies may not be directly linked to crude oil, but their products still need to be transported from factories to warehouses and from warehouses to customers. 

Transportation costs are heavily influenced by diesel prices. Therefore, even companies with indirect exposure to crude oil can experience a meaningful impact on earnings.  Now that we understand how crude oil affects businesses directly and indirectly, the next question is: which sectors are most sensitive to crude oil prices? 

Let us analyse aviation, paints, tyres, chemicals, logistics and FMCG sectors one by one. 

Aviation Sector 

Let us begin with the aviation sector. For airlines, fuel is not just another expense. Aviation Turbine Fuel, or ATF, can account for nearly 30% to 40% of total operating costs. This means that even a relatively small increase in crude oil prices can have a significant impact on airline profitability.  Even if passenger traffic remains strong and revenue continues to grow, rising fuel costs can compress margins and reduce earnings. This is a classic example of operating leverage. 

So, when analysing airline stocks, do not focus only on passenger growth. Track ATF costs, operating margins and management commentary on fuel expenses. 

Paint Industry 

Next, let us look at the paint industry. Many investors do not directly associate the paint sector with crude oil.  However, paint companies use several petrochemical-based inputs such as solvents, resins and monomers. When crude oil prices rise, raw material costs also tend to increase.  But the most important question for investors is: can the company pass these higher costs on to consumers? If a company has a strong brand and pricing power, its margins can remain relatively protected.  This is why the market often gives premium valuations to strong brands that can successfully pass on cost inflation. For paint companies, pricing power can often be more important than crude oil prices themselves. 

Tyre Industry 

Next is the tyre industry. The tyre industry is also linked to crude oil.  Key inputs such as synthetic rubber and carbon black are commonly linked to crude oil derivatives. So, when crude oil prices rise, input costs generally move higher, putting pressure on margins.  As investors, you can track raw material costs as a percentage of sales, gross margins and EBITDA margins. In many cases, an earnings slowdown first becomes visible in margins rather than in revenue numbers. 

Chemical Sector 

Next, let us look at the chemical sector. Investors often oversimplify the impact of crude oil on chemical companies.  They may assume that higher crude oil prices automatically mean lower profits for all chemical companies. However, the reality is more nuanced.  Some companies have long-term contracts, pass-through arrangements and strong customer relationships. These factors can allow them to transfer higher costs to customers.  Other companies may not have the same flexibility. As a result, under the same crude oil environment, some companies may be able to protect their margins while others may struggle.  Therefore, in the chemicals sector, business quality and pricing power can often matter more than crude oil prices alone. 

Logistics Sector 

Next is the logistics sector. For logistics companies, diesel is one of the largest operating expenses. The relationship is straightforward. When crude oil prices rise, diesel costs can increase, which raises transportation costs. However, the most important concept here is cost recovery. Many logistics companies include fuel surcharge clauses in their customer contracts. This allows them to recover a portion of higher fuel costs from customers. That is why two logistics companies operating in the same environment can report very different levels of profitability. 

FMCG Sector 

Next, let us look at the FMCG sector.  The impact of crude oil on FMCG companies is often underestimated by investors. Here, the impact comes from two directions. 

The first is cost pressure. Packaging costs, freight costs and distribution costs can all be linked to crude oil.  The second is demand pressure. When petrol and diesel prices rise continuously, consumers may have less disposable income available for other purchases.  As a result, consumption growth can slow down. Therefore, FMCG companies may face both higher costs and slower demand at the same time.  As an investor, it is important to identify whether a sector faces a single impact or a double impact from crude oil. 

Crude Oil, Inflation, the Rupee and Government Finances 

Now, let us zoom out and look at the broader economy. 

Crude oil does not only impact company earnings. It also influences inflation, currency movements and government finances. 

Crude Oil and Inflation 

The relationship between crude oil and inflation is an important one for every investor to track. Crude oil is a major driver of inflation.  The relationship works like this:  When crude oil prices rise, diesel prices can rise, transportation costs can increase, product prices can increase and, ultimately, inflation can rise. This is why crude oil is considered an important leading indicator of inflation.  The next question is: why does the RBI track crude oil so closely? 

Higher crude oil prices can generally contribute to higher inflation. When inflation rises, interest rates may also remain higher or increase.  So, higher crude oil prices can lead to higher inflation, which can influence interest rates. This can put pressure on company earnings and, ultimately, on the broader market.  This is why investors do not look at crude oil merely as a commodity. They also consider it an early indicator of inflation and interest-rate trends. 

Crude Oil and the Rupee 

Next, let us look at the relationship between crude oil and the rupee. India imports a large proportion of its crude oil requirements, and these imports are paid for in US dollars. 

Therefore, when crude oil prices rise, India’s import bill increases. This can increase demand for the US dollar and put pressure on the rupee. In simple terms, if crude oil prices rise, the import bill can increase, demand for dollars can rise and the rupee can weaken.  A weaker rupee generally benefits export-oriented businesses such as IT and pharmaceutical companies, while import-dependent companies may face higher costs.  This is why investors often look at crude oil, inflation, the rupee and interest rates as an interconnected system. 

Crude Oil and Government Finances 

Next, let us understand the impact on government finances. When crude oil prices rise, the government may need to balance inflation control with revenue collection.  For instance, fuel taxes may be reduced to provide some relief to consumers. However, such measures can affect government revenue and put pressure on the fiscal deficit.  This is why crude oil can influence inflation, government finances and overall economic growth. 

Pass-Through Ability 

Now, let us move to another important concept: pass-through ability. From an investor’s perspective, one of the most important questions is whether a company can pass higher costs on to its consumers.  If a company can recover higher costs from consumers, its margins can remain relatively protected. If it cannot, margins and earnings may come under pressure.  This is why professional investors analyse a company’s pricing power and pass-through ability alongside crude oil prices.  Broadly, businesses can be divided into three categories based on their pass-through ability. 

Strong Pass-Through Businesses 

The first category is businesses with strong pass-through ability, such as leading paint and FMCG brands. These businesses may be able to transfer a large portion of higher costs to consumers.  As a result, their margins can remain relatively stable. 

Moderate Pass-Through Businesses 

The second category is businesses with moderate pass-through ability. For example, many logistics companies can recover a portion of additional fuel costs through fuel surcharges. The impact of higher fuel costs is still felt, but it can remain relatively limited. 

Weak Pass-Through Businesses 

The third category is businesses with weak pass-through ability, such as airlines. Airlines may not always be able to fully pass higher fuel costs on to passengers. As a result, movements in crude oil prices can directly impact their profitability.  There is an important investing lesson here. Crude oil does not affect every company equally.  The final impact depends largely on a company’s pricing power and its ability to pass higher costs on to consumers. 

Sectors That Benefit When Crude Oil Prices Fall 

When crude oil prices fall, several sectors can benefit from lower input and fuel costs. These include airlines, paint companies, tyre manufacturers, logistics companies, FMCG businesses and many chemical companies.  The relationship is straightforward. When costs decline, margins can improve, which can support earnings. Therefore, falling crude oil prices can create an earnings tailwind for these sectors. 

Who Benefits When Crude Oil Prices Rise? 

Now, let us understand another important point. Many investors assume that higher crude oil prices are negative for everyone. However, every macroeconomic event can create both winners and losers.  When crude oil prices rise, upstream oil producers such as ONGC and Oil India generally benefit because they can earn higher realisations on their production.  Higher crude oil prices can support their revenue, profitability and cash flows. This is why the earnings of upstream oil companies may improve during crude oil rallies. 

Conclusion 

In this video, we learnt that crude oil can impact company earnings and margins, inflation and interest rates, the rupee and import costs, and government finances. Most importantly, a company’s pricing power and pass-through ability can often determine how significantly crude oil price movements affect its business. In the next chapter, we will understand another powerful concept: Interest Rates and Valuations. We will decode this in the next chapter. 

See you in the next video. 

Disclaimer: Investments in securities markets are subject to market risks. Read all the related documents carefully before investing.