Crude business: Karnataka polls wipe out Rs 4 billion of OMC revenues

OMC margins plummet, both price hike or excise cut likely

With the electoral battle for Karnataka over, oil-marketing companies (OMCs) on Monday started recovering their revenue loss by hiking prices of petrol by 17 paise and diesel by 21 paise. The freeze on retail prices since April 23, however, meant that the OMCs had to let go up to Rs 350 million per day, according to a Business Standard analysis based on the average consumption of both fuels.
 
The losses increased gradually — a rough estimate shows the markets suffered a revenue loss of more than Rs 200 million per day in May, which for 19 days cost them about Rs 3.8 billion. On an annualised basis, a Rs 1 reduction in margin results in a  Rs 130 billion annual shortfall in OMC revenues. Sources said the companies would recover the loss in the coming weeks through successive upward revisions. OMCs may hedge for a bigger retail price hike this time to the tune of Rs 1.5-2 per litre over two to three weeks, they said. Crude oil prices rose 3 per cent from January to March and OMCs raised retail prices by about 5 per cent during the time.         
 
But from April 1 to May 13, when oil prices rose 18 per cent, OMCs increased retail prices by a mere 1-2 per cent.
 
Since the retail prices were frozen, Indian Oil Corporation’s (IOC’s) marketing margins reduced from an estimated Rs 3.4 per litre to Rs 0.6 per litre for petrol and from Rs 3.8 per litre to Rs 0.8 per litre for diesel, according to the analysis.
 
Due to the assembly elections, the government avoided any rise in fuel retail prices; not by reducing its own revenue stream by cutting excise duties, but by squeezing the margins of state-owned OMCs.
 

But if global prices continue to rise, or even remain stable, a serious impact on the profits of OMCs and dividend to the government cannot be ruled out. The dividend of oil companies — refineries as well as OMCs — to the central government came down 16 per cent in 2017-18 to Rs 146 billion, from Rs 175 billion in 2016-17, the highest-ever achieved. 
 
Margins dropping below Rs 1 per litre will have an impact on the first quarter performance of OMCs. Stocks of OMCs fell slightly on Monday after riding north for a week. OMC stocks had crashed 6-7 per cent intra-day in April, when the government had publicly asked them to absorb losses. Since then, analysts said, value-buying is slowly pushing the stocks up, since the April low was perceived as the nadir.
 
OMCs have not voiced a concern as of now and are assessing the potential losses due to the margin squeeze. IOC Chairman Sanjiv Singh said the price hike has been avoided to reduce pain to the consumer.
 
According to sources, the government is likely to cut excise duty soon to alleviate the situation of OMCs and prevent resultant increase in selling price at petrol stations. In a similar fashion to the revenue loss of marketing companies, the government, too, loses the same quantum, about Rs 130 billion on an annual basis due to a Rs 1 cut.
 
As of now, the excise duty on petrol stands at Rs 19.48 per litre and Rs 15.33 per litre on diesel. Brent crude closed at $77.12 a barrel last week, while Indian basket price was $75.26 per barrel on Saturday.