Moody's expects OMCs' margins to improve over 12-18 months on higher demand

'We expect the regional refining benchmark to average around $3-4/bbl over the next 12-18 months, balancing our expectations of demand recovery alongside incoming capacity additions,' says Moody's

The gain per barrel of crude oil processed by oil marketing companies (OMCs) is expected to increase in the coming financial year 2022-23 on the back of higher demand according to Moody’s Investor Service. The ratings agency also noted that the lowering of excise duty by the centre in November 2021 had hurt the OMCs.

In a commentary on the refining companies in India, Moody’s said, “We expect earnings for all companies to improve as refining and marketing margins improve. Compared with an average gross refining margin of $0.5-0.7 per barrel (bbl) during 2020 and first half of 2021, we expect the regional refining benchmark to average around $3.0-4.0/bbl over the next 12-18 months, balancing our expectations of demand recovery alongside incoming capacity additions. We also expect utilisation rates to remain strong as demand continues to recover toward pre-pandemic levels with the progressive easing of movement restrictions.”

According to Moody’s, the three public sector undertaking (PSU) oil marketing companies had reported higher earnings from their refining operations as refining margins rebounded strongly and capacity utilisation remained strong. These higher earnings were driven by a recovery in demand for transportation fuel because of easing of pandemic-related restrictions and growing vaccination coverage.

But this did not translate into a similar increase in Earnings Before Interest, Taxes, Depreciation, and Amortisation (EBITDA) because of weaker performance in marketing segments. “The weakness in marketing segments resulted from a one-off loss from a reduction in excise duty announced during November 2021. While the companies had paid excise duties as per previously applicable rates, they could not recover the same amount from the customers,” Moody’s said.

Moody’s commentary covers Indian Oil Corporation (IOCL), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL). The centre had cut excise duty on petrol by Rs 5 a litre and on diesel by Rs 10 a litre on November 3, 2021. The revised prices came into effect from November 4, 2021.

“All the three companies reported a steep fall in earnings from their marketing segments. However, we expect earnings from the marketing segment to normalize because we view this loss as one-off and it is not expected to recur unless there are further excise duty cuts announced by the government,” Moody’s said.

In addition to margins, Moody’s also commented on the reported borrowings for all three companies (as of December 31, 2021) that have increased compared with (December 31, 2020) because of high capital spending and dividend payments.

The ratings agency expects capital expenditure and borrowings for the OMCs to remain high but this will be accompanied with improved earnings in the coming year.