Sharper cuts in fuel prices if oil cos forego supernormal profits: Report

The govt raised excise duty on both petrol and diesel by Rs 3 per litre

Consumers may still get sharper cuts in retail prices of petrol and diesel if Indian oil marketing companies decide to reduce their margins on the sale of auto fuels that has increased substantially due to abnormally low global oil prices.

According to an ICICI Securities report, net auto fuel margin of OMCs would be super-normal at Rs 5 per litre on March 16, 2020 despite OMCs absorbing Rs 3 per litre excise duty hike. This would mean that state-owned companies still have room to cut petrol and diesel prices if they are willing to sacrifice supernormal profits coming from higher margins.

The government on Saturday raised excise duty on both petrol and diesel by Rs 3 per litre but OMCs factored this increase in cost and still reduced retail price of the two products marginally. But as it pans out now, OMCs have a very large window to provide relief to consumers.

The brokerage report said that the hike in excise duty on auto fuels by Rs 3 per litre being absorbed by OMCs has led to fall in net marketing margin to Rs 0.33 litre on March 15 from Rs 3.68 per litre on March 13.

However, plunge in refinery transfer price (RTP), based on 15-day rolling average and changed fortnightly, by Rs 4.4 -Rs 5.5 per litre would boost net margin on March 16 to Rs 5.09 per litre as reduced by the price cut, the report said.

At latest prices, the net margin of OMCs works out to Rs 9.01 per litre (price cuts will bring it down over the next 15 days) suggesting net margins are likely to remain very high even in early-April, 2020.

Net marketing margin is Rs 2.09/l in FY20 - till date and was Rs 1.83/l in FY19 vs Rs 0.97p - Rs 1.06/l in FY15-FY18, suggesting new normal is Rs2/l.

"The higher net margin calls for OMCs to cut petrol and diesel retail price sharply to benefit consumers and industry to lower cost and boost consumption and demand," said an oil sector analyst.

An official of OMC, however, said the pricing decisions should be taken while also considering volatility in oil markets but retail price of petrol and diesel is still following international price movements and changes going ahead would be bad.

ICICI Securities said that they have raised FY21E on auto fuel net marketing margin to Rs 1.75/l from Rs 1.5/l earlier. Further upside is not ruled out; upside to OMC's FY21E earning per share (EPS) at a margin of Rs 2.0 - 2.5/l would be 8-29% with HPCL being most sensitive to margins, the report said.

Though gross refinery margins on OMCs are also expected to remain high, ICICI Securities has cut down the projection for FY21 as demand shock due to coronavirus pandemic remains a concern. We have, therefore, cut OMCs' FY21E GRM to US $4.5 - 5.5/bbl from US$5.0 - 6.0/bbl earlier, it said.