Despite fuel price cuts due to Covid-19, OMCs improve net marketing margins

Covid-19 pushed demand squeeze and fall in product prices, including that of fuel is unlikely to impact the profitability of oil marketing companies in the country as their net marketing margin on auto fuel is expected to surge in coming fortnight with expectation that it may remain at elevated levels for rest of the year, analysts tracking the sector said.

The net marketing margin of OMCs on sale of petrol and diesel has increased to Rs 4 per litre by mid-September from Rs 2.23 per litre earlier as there has been correction in global auto fuel prices.

"This rise is likely despite cut in retail price of petrol and diesel by Rs 0.53-1.0/l since 5-Sep 20. Net margin would be Rs 4.39/l on 16-Sep'20 and Rs 5.01/l on 1-Oct if retail prices are not cut further," ICICI Securities said in a report.

What this means is that Indian Oil Corporation, Hindustan Petroleum, Bharat Petroleum could strengthen their financial position in the Covid-19 year even though the demand conditions still looks sketchy and sales has been tepid.

The brokerage has estimated that in FY21,

net marketing margin may be over Rs 3/l for OMCs higher than FY20 levels of Rs 2.3 per litre and analyst estimate of Rs 2.5 per litre. And this level could easily be achieved as marketing margin on sale of auto fuel has remained at around Rs 4.45 per litre till now and it would need margins to average just Rs 2.1 in the rest of the year to get average FY21 margin of Rs 3 per litre.

According to ICICI Securities, upside to IOC and HPCL's FY21E EPS would be 14-15 per cent if net margin is at Rs 3/l.

The global oil market has also splayed a role in boosting margins of Indian OMCs.

While the recent global oil price fall has pruned OMCs' Q2FY21 inventory gains, it has boosted their GRMs (gross refining margin) and pushed up auto fuel marketing margins up despite cut in domestic retail prices.

--IANS

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