Amid improving credit profile of oil refining companies, increased capex may mitigate gains in FY20
While gross refining margins (GRM) of public sector oil refining companies (OMC) will be determined by the movement in global crude oil movements, analysts say that the current fiscal year may see GRMs improving and OMCs’ credit profiles taking a turn for the better. However, this improving trend is likely to be largely mitigated by increased investment.
According to a research note from ratings agency India Ratings and Research (Ind-Ra), OMC credit profiles will improve marginally in FY20 driven by higher EBITDA generation on account of better gross refining margins (GRM) and a reduction in subsidy receivables from the government. “Ind-Ra further expects subsidy receivables to streamline and reduce with the Government of India’s (GoI) likely higher petroleum subsidy budget allocation for FY20,” the note said, adding that there will be lower dividends and share buybacks since cash balances with the OMCs have declined significantly.
“However, the improvement in leverage will be limited by capex outflows for the transition to BS-VI, refining capacity and petrochemical expansion,” it said. The previous financial year 2018-19 saw the weighted average GRM of the OMCs declining to USD 5.1 per barrel (bbl) in FY19 from USD 7.8 per bbl driven by higher crude prices leading to inventory losses and a steep fall in crack spreads of gasoline. In the ongoing financial year, GRMs are seen improving driven by the increasing crack spread on diesel, supported by International Maritime Organisation (IMO) regulations, and improvement in refining complexities, distillate yields and capacity utilisations.
As for shareholder returns via dividends and share buybacks, which increased to Rs 22,300 crore in FY19 from Rs 17,000 crore in FY18, Ind-Ra says they will decrease in FY20 given that the cash balance available with OMCs has already depleted to Rs 2,800 crore in FY19 from Rs 14,600 crore in FY18. “Further, OMCs witnessed increased subsidy receivable of Rs 37,000 crore in FY19 (FY18: Rs 17,000 crore) on account of increase in the total petroleum subsidy burden to Rs 43,200 crore (FY18: Rs 28,200 crore). Although subsidy allocation in the interim budget was higher at Rs 37,480 crore compared with FY19’s Rs 24,800 crore, the same would not be sufficient given the rollover from the last fiscal.
Therefore, Ind-Ra expects GoI to allocate higher petroleum subsidy in the final budget to streamline the subsidy receivables,” the agency said. The improvement in credit profiles, however, will be mitigated by the large capex plans of PSU companies, which are currently expanding and upgrading refineries to comply with BS-VI regulations and expand their pipeline networks and petrochemical segments.