Fuel price increase eases OMC concerns
Business Standard, Delhi   11-Jun-2020

Shares of state-run oil­mar­ket­ing com­pa­nies Hin­dus­tan Petroleum (HPCL), Bharat Petroleum (BPCL), and In­dian Oil (IOC) are up 22-29 per cent from their May lows.

Be­sides the re­sump­tion of eco­nomic ac­tiv­i­ties, the fuel price hikes un­der­taken by th­ese OMCS has been taken pos­i­tively by in­vestors. Th­ese have im­proved con­fi­dence in mar­ket­ing mar­gins on re­tail fu­els like petrol and diesel, look­ing at the rise in crude oil prices. An­a­lysts now be­lieve the mar­ket­ing mar­gins of the state-owned com­pa­nies will re­main firm as they are await­ing fur­ther price hikes in com­ing days in line with the rise in global oil prices.

Over the last three-four days, the OMCS have in­creased per litre price of gaso­line and diesel by a to­tal of Rs. 2.14 and Rs. 2.23, re­spec­tively. This is on the back of a surge in global oil prices, with ma­jor oil-pro­duc­ing coun­tries fol­low­ing pro­duc­tion dis­ci­pline. The price of Brent in the last three weeks has jumped 30 per cent to around $40 per bar­rel. On Wed­nes­day, it was trad­ing 0.85 per cent up at $41.53 (un­til 12.22 am IST).

For th­ese OMCS, the mar­ket­ing seg­ment cost is based on the last 15-day av­er­age prod­uct (crude and crack) prices of gaso­line and diesel in the in­ter­na­tional mar­ket. With the rise in crude oil prices, an­a­lysts ex­pect the OMCS to un­der­take price hikes to the tune of Rs. 4 per litre on auto fuel. This should not be difficult given that the OMCS have al­ready raised prices by more than half the re­quired fig­ure, say an­a­lysts.

The price hikes should en­sure that mar­ket­ing mar­gins are main­tained at Rs. 3 per litre lev­els. Based on cal­cu­la­tions of crude oil prices and hikes taken so far, the mar­gins may look lower, but the over­all auto-fuel mar­gin may still be higher. Be­cause of an in­creas­ing oil-price en­vi­ron­ment, the OMCS will ben­e­fit from in­ven­tory gains (gen­er­ally 10-15 days of stock) in the mar­ket­ing busi­ness. In the pre­vi­ous year, es­pe­cially the March quar­ter, they suf­fered in­ven­tory losses due to fall­ing oil prices. This is also a rea­son an­a­lysts ex­pect a sharp in­crease in earn­ings in FY21.

Be­fore the ex­cise hike in the first week of May, the OMCS were mak­ing Rs. 17-19 per litre of gross mar­ket­ing mar­gin (against nor­mal lev­els of Rs. 3) on auto fuel. Though ab­so­lute gains may not be sig­nif­i­cant in the ab­sence of vol­umes, it should help mit­i­gate some of the ear­lier in­ven­tory losses which would bode well for the June quar­ter and the cur­rent year as a whole, be­lieve an­a­lysts.

“The as­sump­tion for gross mar­ket­ing mar­gin of ~3.3 per litre re­mains un­changed with the net mar­gin at Rs. 1.5 per litre for FY21 and FY22,” say an­a­lysts at Moti­lal Oswal Fi­nan­cial Ser­vices. Probal Sen and Ak­shay Mane of Cen­trum Broking, too, ex­pect mar­ket­ing earn­ings to re­main ro­bust in both FY21 and FY22. With Brent crude prices set­tling in the $35-40 range (elim­i­nat­ing prospects of in­ven­tory losses) and mar­ket­ing busi­ness earn­ings to ben­e­fit from higher mar­gins, they see earn­ings of IOC, HPCL, and BPCL grow­ing an­nu­ally by 27.3 per cent, 14.6 per cent, and 24.2 per cent, re­spec­tively, be­tween FY20 and FY22. Though re­fin­ing mar­gins may re­main soft, this busi­ness should ben­e­fit from low-cost in­ven­tory. Fur­ther, ag­gres­sive dis­counts avail­able for In­dian crude buy­ers are a boon, say an­a­lysts.