New Delhi- Moody’s Investors Service suggests that despite the increasing costs of raw materials, petrol and diesel prices are unlikely to witness an upsurge. The rationale behind this stance is attributed to the impending general elections slated for next year.
The three prominent state-owned fuel retailers, namely Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL), and Hindustan Petroleum Corporation Ltd (HPCL), which collectively command about 90% of the market share, have sustained a freeze on petrol and diesel prices for an unprecedented 18 consecutive months. This resolute stance has been upheld even as the cost of raw materials (crude oil) surged over the past year, resulting in substantial losses during the first half of the fiscal year 2022-23, prior to a subsequent recovery in oil prices that restored profitability.
The recent escalation in international oil prices, notably since August, has once again led to negative profit margins for these three retailers.
“High crude oil prices will weaken the profitability of the three state-owned oil marketing companies in India — IOC, BPCL, and HPCL,” according to a report by Moody’s.
“The three companies will have limited flexibility to pass on higher raw material costs by increasing the retail selling prices of petrol and diesel in the current fiscal year because of upcoming elections in May 2024.”
The oil marketing companies (OMCs) have already experienced a significant erosion in their marketing margins—the difference between net realized prices and international prices. Marketing margins for diesel have turned negative since August, while margins for petrol have substantially narrowed during the same period in tandem with the uptrend in international prices.
This increase in raw material costs can be attributed to the surge in crude oil prices, which jumped by approximately 17% to exceed $90 per barrel in September, compared to an average of $78 per barrel in the first quarter of fiscal year 2024. The rise in oil prices can be attributed to an extension in production cuts by the Organization of the Petroleum Exporting Countries (OPEC) of around 1 million barrels a day, continuing until December 2023, coupled with Russia’s prolonged export reductions of around 300,000 barrels a day during the same period.
Nevertheless, Moody’s anticipates that elevated oil prices will not be sustainable in the long run, particularly as global economic growth experiences a downturn.
“The decline in the OMCs’ marketing margins has been somewhat offset by the increase in gross refining margins (GRMs). The benchmark Singapore GRMs have improved since June, partly due to the ongoing growth in liquid fuels consumption in the region and planned refinery shutdowns that have limited the supply of petroleum products in the area,” the report stated.
Moody’s also expects GRMs and international prices of transportation fuels to moderate in the subsequent quarters, influenced by concerns regarding China’s economic slowdown, which will temper demand, while supply is expected to expand with the return of refineries to operation following scheduled maintenance activities.
However, even with a narrower gap between international and domestic prices, it is likely that retail selling prices will remain unchanged, leading to sustained marketing losses for the OMCs. Their overall profitability will be compromised, despite the mitigation of some marketing losses due to improved GRMs.
After a robust financial performance in the April-June quarter, the OMCs are anticipated to witness a weakening of their operating performance over the next year if oil prices persist at current elevated levels.
Moody’s concludes that the fiscal year 2024 earnings of these three companies are expected to remain robust and exceed historical levels, provided crude oil prices hover between $85 per barrel to $90 per barrel in the latter half of fiscal year 2024. The exceptionally strong earnings in the first quarter of fiscal year 2024 played a significant role in this projection. However, if crude oil prices escalate to around $100 per barrel, the OMCs will likely incur EBITDA losses in the second half of fiscal year 2024.
Strong marketing margins for petrol and diesel were instrumental in driving the robust operating performance in the first quarter of fiscal year 2024. Notably, the OMCs maintained largely unchanged net realized prices for diesel and petrol sales since April 2022, despite declining feedstock costs. For instance, the price of Brent crude dropped to $78 per barrel in the first quarter of fiscal year 2024, compared to $112 per barrel in the same period of fiscal year 2023.
Among the three OMCs, IOCL and BPCL are better equipped to withstand further increases in crude oil prices in comparison to HPCL. This difference in their capacity to absorb rising feedstock costs stems from disparities in their business profiles. IOCL and BPCL boast larger-scale operations, as well as a high degree of integration between their refining and marketing segments, rendering them more resilient to adverse changes in the operating environment. IOCL’s presence in petrochemicals and pipelines further bolsters its business diversification. In contrast, HPCL, with its smaller scale and heavier dependence on marketing operations, is more susceptible to unfavorable price fluctuations.
Despite high crude oil prices, the OMCs have managed to reduce their borrowings over the past few months, aided by robust earnings in the April-June quarter and a decline in crude oil prices compared to fiscal year 2023 levels. This has led to an expectation that leverage, as measured by debt/EBITDA, will remain favorably positioned for all three companies through fiscal year 2024, despite ongoing capital spending and increased working capital requirements due to rising crude oil prices.
The Indian government’s allocation of ₹30,000 crore in capital support for the oil marketing sector, as announced in this year’s budget, will serve to enhance cash flows for the OMCs and partly cover their capital expenditure requirements. IOCL and BPCL have already announced rights issues to the government in line with this development. However, Moody’s has not incorporated this factor into its projections, given the current uncertainty regarding the timing and extent of such proceeds.
By PTI
