Profits may rebound by 3 times from FY23’s Rs 33,000 cr, as softer crude improves credit metrics.
New Delhi
India’s oil marketing companies (OMCs) could see operating profit rebound to Rs 1 lakh crore this fiscal, compared with an average of Rs 60,000 crore between fiscals 2017 and 2022 and thrice last fiscal’s low of Rs 33,000 crore. The rebound in the operating profit of oil marketers is set to ride on softer crude and improvements in credit metrics despite large capex, as indicated by an analysis of three OMCs rated by CRISIL Ratings, accounting for the entire sector.
Government-owned OMCs earn from two businesses: refining, where they earn a gross refining margin, which is the value of refined products at the refinery gate minus the cost of crude oil used to produce them; and marketing, where they earn a margin on petrol, diesel, and other petroleum products sold mainly through retail pumps. According to a Government response in Lok Sabha on July 27, 2023, the refining capacity of crude oil by Indian refineries is 253.92 million metric tonnes per annum (MMTPA). Official data of the Ministry of Petroleum and Natural Gas (MoPNG) suggests that the refining capacity of Indian refineries is projected to increase by about 56 MMTPA by the year 2028, Minister of State (MoPNG) Rameswar Teli informed the House.
“This fiscal year should see a switch in the growth drivers,” says Naveen Vaidyanathan, Director, CRISIL Ratings. Marketing margins could veer towards an operating profit of Rs 5-7 per litre, while gross refining margins may moderate to USD $6-8 per barrel as the global product demand-supply imbalance eases. This forecast is predicated on crude oil prices averaging USD 80 per barrel and no cut in retail pump prices,” says The Government has 52.98 percent (51.5 percent) stakes in BPCL and Indian Oil Corporation, while HPCL is 54.9 percent owned by ONGC.
The higher profitability would help improve the sector’s credit metrics, which had weakened significantly in the past few fiscal years amid muted profitability and significant capital expenditure (capex), notes Crisil. In Budget FY24, the Government announced Rs 300 billion in capital support for OMCs. The rebound in operating profit is critical for the sector that has seen a significant increase in capex, as much as Rs 3.3 lakh crore between fiscals 2017 and 2023 to expand capacity in downstream refining and petrochemicals, product pipelines and marketing infrastructure. Capex will continue to be high this fiscal year and is estimated at Rs 54,000 crore. For instance, Bharat Petroleum Corporation has announced higher capex, investing Rs 1.3 trillion–1.5 trillion over the next 5-7 years, according to Anand Rathi research, and the PSU’s operating cashflows and balance sheet are strong enough to fund this, but with the budgetary support announced by the Government, a Rs 300 billion grant to the OMCs for energy transition would be a means to implement this. It also notes that Q1 FY24 has been highly profitable for the OMCs, which resulted in recouping the weak H1 FY23 performance. The Crisil report finds that fiscal 2023 saw record gross refining margins averaging USD 15 per barrel. Global demand, particularly for diesel, was strong as prices of alternative fuels such as natural gas soared and the European Union imposed sanctions on Russian products. However, soaring crude oil prices, which averaged USD 94 per barrel for the fiscal year, were not accompanied by higher retail prices, which have remained unchanged since May 2022. What that means is that despite strong refining margins, marketing losses were steep at Rs 8 per litre, which kept the overall profitability of OMCs weak last fiscal. Gross debt more than doubled from Rs 1.2 lakh crore in fiscal 2017 to Rs 2.6 lakh crore in fiscal 2023, even as profitability remained subdued. There was a steady fall in the price
of crude oil as the last fiscal progressed, which helped OMCs swing from an operating loss in the first quarter to strong profits in the fourth quarter. According to Joanne Gonsalves, Associate Director, CRISIL Ratings, despite continued capex, improved profitability should help shore up the standalone credit metrics of OMCs from last fiscal’s low levels. “For instance, interest coverage could improve to 7.4 times versus 2.4 times last fiscal,” says Jopanne.
Nomura Ratings points out that rising crude oil prices and product spreads are dragging refining margins down from recent peaks, which will have an impact on the profitability of OMCs in 2QFY23 if current trends continue. “HPCL will have the highest impact in this situation, given its higher share of marketing in earnings,” says analyst Hemang Khanna. Nomura expects Reliance Industries and the OMCs—BPCL, IOCL, and HPCL—to be key beneficiaries of the strength in refining margins. Going ahead, Indian refiners will further benefit from advantageous crude oil sourcing, which will keep realised margins at a significant premium to benchmark margins.