Delayed Price Hikes for Indian Oil Marketing Companies

Conflicting to the market expectations, Oil Marketing Companies (OMCs) have not raised retail prices of petrol, diesel, and LPG after the 5 state elections, despite double-digit negative petrol and diesel margins. The OMCs are waiting for crude volatility to settle and to arrive at a comprehensive response along with the Government.

Despite the high marketing losses, Quarter-to-date (QTD) average margin is Rs.1.7/ltr and Liquid Petroleum Gas (LPG) under-recovery is about Rs.75bn.

OMCs have the luxury of waiting for crude volatility to settle, thanks to high Singapore refining margins of over $ 7.0/bbl (QTD) and likely huge inventory gains estimated at Rs.223bn if crude prices sustain.

While the large inventory gains at the end of the year mean higher working capital-driven debt but would wind down in the subsequent quarters.

OMCs are currently observing negative margins of Rs.12/ltr and Rs.9.5/ltr on sale of diesel and petrol respectively but are likely to improve to a negative margin of Rs 6/ltr by the end of next fortnight as prices have come off the peak.

The required retail price hike would be Rs.12/ ltr (assuming no excise duty cut) earning gross margins of Rs.4.1/ltr, which is the FY21 average. Similarly, LPG under-recovery based on current prices is around Rs.300/cyl which either needs to be reimbursed by the Government or to be passed on to the buyers.

OMCs will likely earn a negative Rs.0.3/ltr from retail fuel marketing, and a further hit of Rs.75bn will come from LPG under-recovery for the current quarter.

However, both these will be more than offset by higher inventory gains if oil prices remain at current levels. Based on a $100/bbl crude price, inventory gains for the quarter could be around Rs.220bn, and assuming core Gross Refining Margins (GRMs) in the $ 6-7/bbl range, OMCs will record EBITDA of around Rs.157bn (considering no LPG reimbursement from the Government) vs. Rs.155bn in the previous quarter and Rs.232bn in 4QFY21.

Indian Oil Corp. will be better-off as it maintains higher inventory, implying higher gains while Bharat Petroleum will be worse-off because of lower inventory levels.

While the profitability is likely to be maintained during the quarter, the balance sheet is likely to take a hit because of higher working capital requirements from higher inventory costs. This will reverse once the oil prices will go back to previous positions.