NEW DELHI: The impact of the Covid-19 lockdown on petroleum demand is set to substantially dent the earnings of Oil Marketing Companies (OMC) and may result in capital expenditure being slashed by nearly a third this financial year.
According to global ratings firm Fitch Ratings, the standalone credit profiles of India’s State-run OMCs are at “greater risk of downward revision due to the coronavirus-induced drop in demand and refining margins, and their continued investments”.
Recent data from the Ministry of Petroleum showed that petroleum product consumption has been halved in April compared to the previous year. Petrol consumption dived 60 per cent while diesel sales fell 55 per cent during the month, with total fuel consumption coming in at just 10 million tonnes — the worst decline in sales in over a dozen years.
The global collapse of crude oil prices have led to substantial inventory losses for OMCs in FY20; the short-term disruption in the payments cycle may also see their gross debt increasing for the year.For the current fiscal, OMCs face “... lower demand, weak refining margins, high capex, though below earlier estimates, and continuing dividend outflows”.
While partially offset by unprecedented marketing margins until May 5 (since OMCs did not cut retail prices since March 16 though crude prices collapsed by over 60 per cent), their earnings from refining operations (Gross Refining Margins or GRM) during FY21 is likely to remain flat compared to the previous year.
The increase in excise duties on petrol and diesel by the Central government from May 6 has already brought down marketing margins closer to normal levels.
However, the squeeze on GRMs should be partly offset by the reduced value of refining fuel losses due to low crude oil prices, Fitch added.Despite these mitigating factors, Fitch notes that spending by OMCs on capital expenditure may fall by as much as 30 per cent in FY21 and FY22.
“We expect the three firms to undertake only capex to continue brownfield refinery expansions and marketing and pipeline infrastructure, and delay investments in discretionary greenfield projects. Capex in FY21 would also be cut as Covid-19 containment measures reduce labour availability and raise logistical challenges,” it said.
Fitch has revised its capex forecast for the three State-run OMCs over the next two years from Rs 60,000-63,000 crore earlier to Rs 42,000-44,000 crore now.