OMCs unlikely to be impacted by US withdrawal of sanction waiver

Analysts say firms can source oil from other countries, but investors need to be conscious about rising crude prices

Stocks of oil marketing companies or OMCs, which includes Indian Oil Corporation, Hindustan Petroleum and Bharat Petroleum, fell 5–7 per cent on Monday, following the news that the US may not renew exemptions from its sanctions to buyers of Iranian crude after they expire on May 2.
 
Calling the stock price movement as a knee-jerk reaction to the global development, analysts say the event may not alter the financials of Indian OMCs much. “I do not expect a significant impact to earnings for OMCs, as on a comparable basis — in terms of grade and price — companies should be able to substitute Iranian crude,” says an analyst with a domestic brokerage. The optimism is largely because of the ability to source from other countries if supply from Iran is terminated. Even if imports from Iran account for 20 per cent of total crude oil imports, volumes, following the recent escalation of global tension, have been moderating. In December 2018, import volumes from Iran fell by over 60 per cent year-on-year. The declining trend, coupled with the ability of Indian companies to substitute sourcing from other countries, compels analysts to believe that the global development may not have a far-reaching implication on OMCs.

 
Despite Iran being the second largest oil producer among Opec (Organization of the Petroleum Exporting Countries) members, for India, Iraq and Saudi Arabia are the key sourcing markets, which together help companies meet nearly half their import requirements. Even in the past, requirements have been replaced from the UAE, Nigeria and Venezuela.
 
Overall, FY19 is expected to end positively for the OMCs. With the March’19 quarter (Q4) having witnessed stable and favourable crude oil prices, the Street is factoring net profit growth of over 35 per cent for OMCs. Analysts at Systematix Research say auto-fuel marketing gross margins have recorded their best quarter ever, averaging about Rs 6 a litre for both petrol and diesel.
 
“Margins carried forward from last December when a steep fall in crude prices allowed huge margin cushion, enabling OMCs to recover the Rs 1 per litre cut they had taken as well as cushion the huge inventory loss last quarter,” they add. However, those at CLSA caution that Q4 margins could just be a one-off. “After the elections, we see a low chance of super-normal marketing margins as tight fiscal conditions may push the central government to raise the excise duty instead,” they note.
 
Therefore, while the near term looks bright for OMCs, in light of growing geopolitical tension and rising crude oil prices, investors have reasons to be cautious going forward.