The profitability of state-run oil marketing companies (OMCs) is expected to improve as falling crude oil prices strengthen fuel marketing margins, although rising debt levels and uncertainty over future fuel taxation could limit the sector's long-term earnings outlook, according to a report by JP Morgan.
The brokerage said composite margins — which combine profits from refining and fuel marketing operations on petrol and diesel — have risen above levels seen before the recent West Asia conflict. The improvement has been driven by lower crude oil prices and reduced central excise duties on petrol and diesel.
Among the three state-run OMCs — Bharat Petroleum Corporation Limited (BPCL), Indian Oil Corporation (IOC) and Hindustan Petroleum Corporation Limited (HPCL) — BPCL and IOC are expected to benefit the most if crude oil prices continue to soften.
The outbreak of the West Asia conflict had triggered a sharp rise in global crude oil prices. However, retail fuel prices in India remained largely unchanged for an extended period and increased only partially despite higher input costs. Even after the Rs 7.50 per litre hike in petrol and diesel prices in May, retail prices remained below cost levels.
"Our estimates for OMC composite margins on petrol and diesel are now higher than pre-war levels. Losses on LPG are still elevated, but should also start to track oil down soon," JP Morgan said.
The report added that earnings during the April-June quarter are likely to be impacted by significant inventory losses due to the recent decline in crude oil prices. However, profitability is expected to improve from the second quarter of the current financial year.
Despite the recovery in margins, the brokerage highlighted two major concerns. OMCs have accumulated substantial debt over the past few months after absorbing losses on the sale of petrol, diesel and liquefied petroleum gas (LPG). In addition, a significant portion of the improvement in profitability has come from lower excise duties imposed by the government.
The government had reduced excise duty on petrol and diesel by Rs 10 per litre each in March to shield consumers from an immediate increase in retail fuel prices.
The brokerage estimated that current composite margins for BPCL and IOC are already above pre-conflict levels, while HPCL's margins have largely recovered to, or exceeded, levels seen before the recent oil price spike.
While LPG losses continue to remain significant, they are expected to moderate as lower crude oil prices feed through to the sector.