OMCs feel the heat of increasing competition

GST impact and pending merger of oil PSUs add to that concern

Shares of government oil marketing companies (OMCs) — Indian Oil Corporation (IOC), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL) — lost three to five per cent on Thursday. This came on worries of higher competitive pressures from private players, which could lead to a loss in market share and marketing margins for the three companies. 

The government has invited Reliance Industries and BP to invest in retail outlets. While the OMC network, with about 55,000 stations, is still unmatched and cannot be replicated overnight, private players are gradually adding new stations and gaining market share. 

The private players doubled their market share, led by additional fuel stations and higher discounts, over FY17 to 5.3 per cent in petrol (FY16: 3.5 per cent) and six per cent in diesel (FY16: 3.1 per cent), according to Antique Stock Broking.

Both Reliance Industries and Essar Oil have been adding outlets. Reliance opened 281 additional ones during FY17, taking the count of operational outlets (of a total of 1,400 in place) to 1,221 (as of March), while Essar added 1,400 outlets, primarily in rural areas, to its existing base of 2,100 in FY16. Reliance can expand to 5,000 outlets and BP another 3,500, leading to a further increase in market share and competition for the OMCs, say analysts.

Diesel, which accounted for 49-53 per cent of OMCs’ domestic sales volumes in FY16, declined to 48-51 per cent in FY17. 

Any decline in domestic diesel sales volumes and marketing margins hurts OMCs significantly, given that it accounts for almost half of their total domestic sales volumes. 

In the fourth quarter of FY17, OMCs’ diesel sales volumes declined, and perhaps even their marketing margins fell, say analysts at ICICI Securities. 

The challenges for OMCs also stem from the fact that in the new goods and services tax (GST) regime, oil products have been kept out of the GST ambit. 

The current structure means that while OMCs will be paying tax on procurement of goods and services, they will not be able to set this off against sale of petroleum products like petrol, diesel and aviation turbine fuel. 

IOC is already indicating an impact of Rs 4,000-5,000 crore per annum due to non-availability of input tax credit on diesel and petrol sales. 

Abhijeet Bora at Sharekhan said he was expecting strong earnings growth for IOC, led by the Paradip refinery expansions; imminent GST implementation would have a negative impact on profitability of OMCs and he, thereby, now has a neutral rating for IOC. 

GST resolution is key to earnings growth for all the three OMCs. On gross refining margins, they have continued to benefit from inventory gains. However, a benefit on account of inventory gain is unlikely in FY18. 

For HPCL, a merger with Oil and Natural Gas Corporation (ONGC) also remains an overhang. 

A foreign brokerage has highlighted this possibility of ONGC in order to fund a HPCL acquisition offloading its stake in IOC and putting pressure on IOC stock prices. 

Further, there could be a possibility of merger of IOC and Oil India. With multiple pressures and uncertainties, the stock in the near term could feel the heat, in spite of benefits that might accrue due to lower crude oil prices and a shift to daily fuel pricing.