Partial gains of diesel price deregulation visible in OMCs' results

IOC, BPCL, HPCL's net profit remained weak, given low sales volume growth; analysts remain positive on what's ahead

Oil marketing companies (OMCs) Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL) have reported a mixed set of numbers for the September quarter. On the one hand, weak revenue growth, due to muted volumes, and gross refining margins (GRMs) have impacted overall profitability. On the other hand, lesser interest cost burden following gradual diesel price deregulation and timely compensation by the government towards underrecovery in retail sales, provided some comfort.

Overall operational profitability remains under pressure. The government also more than doubled the excise duty on petrol and diesel on Thursday to Rs 2.7/litre and Rs 2.96/litre, respectively. As a result, the shares of IOC, BPCL and HPCL fell 4.4 per cent, 4.5 per cent and 6.1 per cent, respectively, on a day the Sensex ended flattish.

Sudeep Anand, vice-president, institutional research, IDBI Capital, says: "OMCs are currently making overrecoveries of Rs 2 a litre on petrol and diesel each. The excise duty hike will partially reduce that. We believe they're unlikely to cut fuel prices following this move and will not witness meaningful impact following this move."

In the quarter, IOC and BPCL reported flattish revenue growth due to low (two-three per cent) year-on-year growth in sales volume. IOC's revenue grew 1.3 per cent over a year to Rs 111,305 crore. That of BPCL grew at a muted 0.4 per cent to Rs 61,979 crore. HPCL, though, witnessed a 1.8 per cent fall over a year before in net sales to Rs 51,633 crore. Inventory losses, due to decline in crude oil prices, also impacted their GRMs and overall profitability. IOC reported a inventory valuation loss of Rs 3,528 crore and BPCL at Rs 270 crore.  

Positively, consistent monthly diesel price rises have benefited the OMCs in two ways. First, gross underrecoveries reduced 42.7 per cent over a year before for BPCL to Rs 5,040 crore; it fell about 20 per cent for IOC to Rs 12,213 crore and by 24.1 per cent for HPCL to Rs 5,025 crore. The government shared 25-30 per cent of gross underrecoveries, with upstream entities (Oil and Natural Gas Corp, Oil India, GAIL) sharing 70-75 per cent.

On a net basis, though, while BPCL did not bear any subsidy burden, IOC recorded a nominal one of Rs 37 crore for selling fuel lower than the cost price. In the year-ago period, the two firms had borne Rs 215 crore and Rs 410 crore, respectively on this count.

HPCL, though, posted overrecoveries of Rs 124 crore in the quarter versus an underrecovery of Rs 200 crore in the September 2013 one.

Lower underrecoveries and the good profit on sale of petrol and diesel also led to lower debt. So, interest costs fell for all three companies and aided profitability. However, as there were underrecoveries in the first quarter, they recorded a marginal subsidy burden for the financial year's first half, equivalent to four to five per cent of gross underrecoveries.

On the whole, the weak show at the top Sept resultline led to muted performance at the profit level for BPCL and IOC. IOC slipped into the red with a net loss at Rs 899 crore (versus net profit of Rs 1,684 crore in the year-ago period) and BPCL saw net profits halve to Rs 464 crore. Overrecoveries, coupled with a low,base in the year-ago quarter, led to a strong growth of 167 per cent in HPCL's net profit.

Most analysts remain positive on the OMCs in the light of benefits from full diesel price deregulation, even as the trend in GRMs is expected to remain benign. "Diesel price hikes and eventual deregulation is expected to result in a 52 per cent reduction in gross underrecoveries by FY16 versus FY14, to Rs 67,400 crore. For OMCs, the earnings growth benefit is already seen from reduction in interest cost and (we) now expect to be driven by higher marketing margin in diesel (similar to petrol),” write analysts at Motilal Oswal Securities in a recent report. They say the rise in excise duty will be neutral for OMCs.  BPCL remains the top pick of most analysts, given the potential in its upstream business.