West Asia Peace Deal To Limit India Inc Profit Drop To 100 Basis Points: Crisil Ratings

A drop in global oil prices after a new peace deal in West Asia will bring major relief to Indian companies. Rating agency Crisil Ratings reported in its latest study on Friday that the hit to company profit margins will be limited to about 100 basis points, which is half of the 200 basis points drop that experts originally feared when the conflict was at its worst.

The reopening of the Strait of Hormuz has cleared up major shipping delays, after the United States and Iran signed a temporary peace agreement. If this peace holds, the heavy pressure on Indian company profits should ease up for the rest of the year.

This margin insulation comes as a massive breather for the broader Indian economy. According to macro analysts, a sustained drop in crude oil imports will significantly lower India's current account deficit (CAD) and alleviate depreciation pressure on the Indian Rupee. With energy costs normalizing, local manufacturing sectors that rely on heavy logistics and freight will see a sharp reduction in working capital cycles over the next two quarters.

Crisil Ratings looked at 34 major business areas in India. Earlier, they warned that if the conflict dragged on and the sea route stayed closed, corporate profit margins could drop by 200 basis points down to 12%. Now that shipping is back to normal, the drop will only be about 100 basis points, keeping average profits steady at nearly 11%.

Oil and Fertiliser Companies 

Brent crude oil prices are now expected to average between $80 and $85 per barrel this year as supplies return to normal. This cheaper oil is giving an immediate boost to several Indian markets.

Indian Oil Marketing Companies (OMCs) lost an estimated Rs 40,000 crore to Rs 45,000 crore between March and May due to the crisis. However, with oil prices dropping, these companies are expected to bounce back and show good operating profits for the year.

The fertiliser sector is also doing well and are also being protected by steady government subsidies and better supply lines. Out of the 34 business sectors tracked, Crisil says 24 will see very little impact on their revenues.

While OMCs bear the sweetest fruit of this de-escalation, tracking toward a swift recovery in marketing margins, the fertilizer sector is also getting relief. Lower crude prices have cooled down pooled natural gas prices, which serve as the primary feedstock for urea manufacturing. Crisil’s data indicates that this supply chain correction will significantly lower the government's subsidy burden, ensuring the timely clearance of outstanding dues to domestic agro-chemical manufacturers.

Airlines and Chemical Sectors 

On the other hand, 10 sectors are still struggling. Their profit margins are expected to drop by 10% to 33% compared to what they expected before the war.

The Indian aviation industry is facing lower profits in the first half of the year due to pressure on the Indian rupee and limited power to raise ticket prices. Other businesses, like specialty chemicals, packaging, and textiles, are also struggling because they cannot easily pass the high cost of raw materials onto their customers.

For the lagging specialty chemicals and textile players, the issue isn't just raw material costs, but a slowdown in export demand from Western markets. Many of these mid-tier Indian firms are currently flushing out high-cost raw material inventory purchased during the height of the Hormuz blockade. Profit margins for these 10 sectors will likely remain compressed until late Q3, when cheaper fresh raw materials finally cycle into production lines.

Even with these problems, credit experts emphasize that no single business sector is facing a severe crisis, as Indian companies have strong bank balances to handle the stress.

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