The decision by the government to raise duties on petrol and diesel and not allowing oil marketing companies (OMCs) to increase retail prices might squeeze their marketing margins by about 64 per cent. Analysts expect gross marketing margins to still be around Rs 7 a litre on the two fuels.
This is because OMCs did not pass on the benefits of lower global petroleum prices to consumers —at one point, the gross marketing margin was Rs 19. The cut in marketing margin has come at a time when it was the only saving grace for OMCs’ earnings. Refining margins have remained subdued with plunging demand and retail sales volumes taking a beating during the lockdown.
Not surprisingly, analysts are cutting OMC earnings estimates by 10-27 per cent for financial year 2020-21 (FY21). Hindustan Petroleum Corporation, Bharat Petroleum Corporation and Indian Oil Corporation corrected up to 5.68 per cent on the bourses on Wednesday.
“The tax hike could result in higher working capital outflow for OMCs, which will partly offset the working capital savings from lower inventory costs,” said Vikas Halan, senior vice-president, corporate finance, Moody’s Investors Service.
A report by ICICI Securities indicated that net marketing margin would decline to Rs 2.3-4.4 a litre after the current hike, assuming decline in volume of 32-62 per cent. “We estimate first quarter gross auto fuel marketing margin at Rs 9.9 a litre and net margin at Rs 5.4-7.4 a litre,” it said. Net margins are arrived at after removing certain other expenses.
Analysts at ICICI Securities were no longer confident of net marketing margin being Rs 2.5-3 a litre in FY21. In fact, they have cut the target prices for OMCs by 16-34 per cent.
Email queries sent to IndianOil and HPCL spokespersons remained unanswered.
On refining margins, the outlook was already weak. The benchmark Singapore GRM had averaged at $1.2 a barrel during the March quarter versus $3.2 in Q4FY19 and $1.6 in the Q3FY20. Refining margins have fallen further in the June quarter. Data suggests that April benchmark averaged at negative $1, and May also could suffer from a volatile oil price scenario.
Volumes also continued to be impacted. Experts feel though that with falling crude prices and looking at the fiscal challenges faced by the government, while excise duty hike is on expected lines, it would’ve been better if it was done once demand had recovered. As long as volumes continue to be low, OMCs’ net earnings impact would be negative said analysts at Emkay Global, who say outlook depends on how quickly lockdown is lifted.