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Najeeb Mubarki
CRUDE Awakenings
With lower risk-taking ability, small businesses are worst-hit by the current oil
price hike in more ways than one
Anirvan Ghosh
Public sector oil companies may have just got a breather with the government
effecting the inevitable oil price hike but look who's complaining—with crude prices at
$135 a barrel last week, small and medium businesses (SMBs) are reeling under crude
shock.
While the larger companies are more or less secure with the current round of price hike,
the smaller companies ranging from sectors such as defence to IT, have been affected
considerably.
The gradual but steady rise of crude was only expected. And some companies were
prepared for it. Still, the cascading nature of these prices means that SMBs cannot wish
away what it brings in its wake. They also have to contend with inflation that threatens
to cross the 9% mark. For almost five years, a fast-growing India shrugged it off. Only
now is it recoiling in pain as the government goes for a justified price hike.
First, energy costs will zoom for thousands of small businesses, which work under
frequent power outages, and hence, the worst-affected would be those using more
gensets. Like the carpet exporters from Bhadohi, near Varanasi, who implemented new
technology to get ahead of the game and now find themselves at square one. "This is
disastrous for us since we face 8-10 hours of power cuts each day," says Sandeep
Jaiswal, proprietor of Himalaya Collection, one of the largest exporters from the carpet
belt. The companies in the region are going to raise the price of their carpets by over
15%. "We don't have a choice. We have to use generators," adds Jaiswal. The
manufacturers fear that the price hike is bound to make their carpets unattractive and
competitors from neighbouring countries will eat into their business. The eastern UP
region is reeling under daily power cuts of up to 10 hours a day in urban areas and about
15 hours a day in the smaller towns.
However, lack of power is not an issue for defence supplier SEC Industries in
Hyderabad, a company that makes equipment for some of the most sophisticated
weapons, including the Prithvi missile. They use only electric power and hence are
insulated from the direct impact of the fuel price hike. Again, transport costs bung a
spanner in their works. "That (transport) will hit us hard, adding around 10% to the
cost," says D Vidyasagar, managing director of SEC Industries. Add around the same for
the increased employee allowances, he says, "You have a significant increase in costs".
Prabhat Awasthi, head of equity research at Lehman Brothers, estimates that the freight
costs for companies would move upward by about 5%. Taking into account the variations
in levies on diesel in each state, the transport companies are planning to hike rates by
10-15%. But since the offset clause has taken effect, Vidyasagar and other firms, like
Alpha Design Technologies, are not facing any survival problems.
Even in the software domain, promoters are feeling the pinch. Though transport costs
don't matter much here, people do. In Bangalore, the IT and ITES players are facing an
immediate cost escalation-the cabbies have announced that they would shortly hike their
rates. Since all of them depend on cabs to ferry their employees to and fro in the dead of
the night, they can't avoid this cost. "Most of our people avail companymanaged
transport facility to commute to office and back. While this activity in mainly outsourced,
the increase in fuel price will be passed on to the company and will impact costs," says
Rajan NV, senior vice-president of Infinite Computer Solutions, a Bangalore-based
telecom service provider and equipmentmaker. The workplace is in Whitefield, which is
around 20 km from the city. Over the last three years, cab operators' rates have gone up
more than 23%. A similar problem is being faced by Zylog Systems, a Rs 606 crore IT
services and consulting firm that resides on the outskirts of Chennai. "It's a dent but a
manageable one," says SP Srihari, CFO of Zylog.
According to Sampath Shetty, VP of TeamLease Services, India's largest staffing
company, "Most organisations usually plan ahead." So the companies are looking at
using buses for sets of employees rather than ferry just one of two in a cab if they live in
far-flung areas. Companies are also planning to opt for a transport allowance for
everyone rather than provide cabs, which work out costlier. Rajan points out that IT
companies have no choice but to provide 100% back-up facility for power. "Given the
frequent power cuts, the increase in diesel prices by 10% will have a major impact on
our costs." Since the oil shock came like an injection rather than a hammer on the head,
the companies were already thinking on these lines before the government finally "bit
the bullet". The spurt in the price of aviation fuel, by about 15-20%, means lesser
foreign travel for most firms.
Lehman's Awasthi points out that the impact shall vary and in different measures
across the sector. The Nashik-based Sula Wines has already contemplated on a price rise
without being unduly worried. The company, which is one of the fastest-growing
winemakers and is among the wineries that led Nashik to produce 75% of Indian wine,
has faced chronic power shortages. "We use diesel to water our vineyards," says Rajeev
Samant, the founder-CEO, adding, "the diesel price hike shall be a burden". It's plain
lack of power that has done them in, a fact attested to by Vintage Wines as well, which
faces more than 14 hours of outage daily. As Awasthi points out, the freight shall be a
major component in the rise in costs. Samant concurs, adding that the wine sector prices
are quite sticky as it's a long process to augment it. But there is still no reason to panic
or be pessimistic about the sector because the demand for wine, in the otherwise
booming economy, shall still not result in a sharp fall in supply, says Alok Chandra, a
wine consultant at Gryphon. He says that some players might not increase prices right
now and might wait till August to take a decision but the largely upper middle class
consumers have the ability to take the price rise in their stride.
In the early 1970s, a fourfold rise in the price of oil almost brought the world to a
standstill. The shock of the Arab embargo left a deep mark in many countries. During the
late 90s and the early part of this millennium, even a $1 price rise resulted in vociferous
appeals to bring it back to prior levels. Over the last couple of years, the price has again
quadrupled. However, the Indian SMBs, under the double whammy of food-related
inflation and soaring oil prices, are not frightened of survival and are not bucking down.
Instead, they are looking at solutions to tide over the crisis.
OIL’S NOT WELL
Energy costs will zoom for thousands of SMBs, which work under frequent power
outages
The spurt in the price of aviation fuel, by about 15-20%, translates into lesser foreign
travel for most firms
Companies are also planning to opt for transport allowance for all their employees
rather than provide cabs, which work out costlier