OMCs to continue to reap benefits of lower crude oil prices, de-regulation

Though crude prices are down by 50%, retail prices of petrol and diesel have not been revised proportionately

Fall in crude oil prices and fuel de-regulation has put the oil marketing companies -- IndianOil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation -- in a sweet spot. 

Though crude oil price is down by over 50% since last year, the same has not trickled down to retail prices, with price of petrol down only 13% and that of diesel down 23%. 

Brent crude which was priced at 101.9 per barrel in August 2014 has dropped to 48.6 per barrel in August 2015.

The latest fuel price cut -- diesel by 0.5 per litre and petrol by Rs 2 per litre -- was lower than anticipated, pushing up marketing margins on diesel to Rs 1.5 a litre and on petrol to Rs 3.4 a litre. 

Analysts believe reforms are here to stay and are positive for the valuations of the oil marketing companies.

"The fall in Indian retail petroleum fuel prices was lower than that in crude as government lapped up majority of this benefit through excise duty hikes, a trend seen in other countries too (mix of margin + taxes)," said Harshad Borawake of Motilal Oswal in a recent report. 

Borawake added that pricing freedom for the oil marketing companies (OMCs) improved marketing earnings predictability. 

Tax component in diesel, however, increased from 18% to 38% and increased from 30% to 48% in petrol. Higher tax component in fuel price provides a cushion against impact of sharp increase in oil prices and ensures efficient use of forex (foreign exchange) for crude imports. 

Riding on higher refining margins in the first quarter of this fiscal, oil marketing companies posted good earnings. Higher refining margins and inventory gains helped state-run Hindustan Petroleum Corporation Limited to post an over 34 times increase in its net profit at Rs 1,588 crore for the first quarter of this fiscal. Net profit for the corresponding quarter of last year stood at Rs 46 crore.

"The increase in profit is primarily because of higher refining margins, inventory gains as also increase in refining throughput and domestic market sales," HPCL said.

Bharat Petroleum Corp Ltd (BPCL), nearly doubled its net profit for the first quarter of the fiscal, posting a more than 95% jump in its net profit to Rs 2,376.16 crore compared with Rs 1,216.26 crore posted in the same period a year ago. 

Indian Oil Corp, the nation’s biggest oil firm, sais its net profit more than doubled to Rs 6,436 crore on higher refining margins.