Pricing pressure hurts fuel retailers’ earnings

Fitch Ratings said it expects demand for India’s petroleum product to remain strong, driven by 7.8% GDP growth for FY13. It expects GRMs to moderate but remain close to mid-cycle levels in the second half of FY23. Nevertheless, the large marketing losses at OMCs are likely to be offset by the gains from strong GRMs during the year.

While crude oil prices have risen from around $77 a barrel at the start of the calendar year and Brent crossed $130 during the first quarter, retail auto fuel prices have not changed much. This hurt OMC’s Q1 performance and is likely to limit future earnings.

Analysts at Yes Securities Ltd said that despite international product prices touching record highs following the Russia-Ukraine conflict, the lack of revision in domestic, retail, petrol and diesel prices resulted in significantly weaker marketing margins, which were dented by marketing inventory. The loss was increased. ,

While Indian Oil Corporation Limited (IOC) managed to register an operating profit of 1,750 crore (84% compared to a year ago and down 85% sequentially), Bharat Petroleum Corp Ltd (BPCL) and Hindustan Petroleum Corp Ltd (HPCL) reported operating losses of approx. 5,900 crore and 12,500 crores respectively. This was even as companies reported stronger GRMs, as the benchmark Singapore GRM rose to an average of around $21.4 per barrel in the June quarter, a significant jump from the $8 per barrel seen in the March quarter . These were helped by repairing the cracks in diesel and petrol. The decline in Russian and Chinese exports of refined products also affected demand-supply dynamics at a time of improving demand in the US and Europe, and inventories remained at multi-year lows.

As a result, GRMs for IOCL, BPCL and HPCL stood at $31.8, $27.5 and $16.7 per barrel, respectively, significantly above the $18.5, $15.3 per barrel and $12.44 reported during Q4, according to analysts’ calculations. was. GRM was comparatively weak for HPCL as the company is yet to reap the benefits of expansion at its Vizag refinery. Analysts say the merger of Bina Refinery has helped in overall margins for BPCL.

On the positive side, the volume growth remains very strong and is viewed in a positive light. Nevertheless, higher crude oil prices will reduce marketing margins.

Analysts at Fitch Ratings said prolonged government intervention in auto fuel retail prices and losses in OMCs would be negative for the standalone credit profile of OMCs and could lead to a rethink on the government’s approach to fuel prices. “We believe that freedom for OMCs to control retail fuel prices will support the government’s efforts to restart BPCL’s disinvestment, should it choose to do so,” he said.

However, the recent fall in crude oil prices should provide some respite. Analysts at JM Financial, in their results review report on August 7, had said under-recoveries of OMCs auto fuels declined. High to current 3 a liter 15-16/litre in the first quarter of FY 2013 due to fall in crude oil price and reduction in product cracks.

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