Petrol and diesel costs are unlikely to be elevated regardless of firming uncooked materials prices due to upcoming common elections subsequent yr, Moody’s Buyers Service stated.
Three state-owned gas retailers — Indian Oil Company (IOC), Bharat Petroleum Company Ltd (BPCL) and Hindustan Petroleum Company Ltd (HPCL) — which management roughly 90% of the market, have saved petrol and diesel costs on freeze for a report 18 months in a row.
That is regardless of the uncooked materials (crude oil) price surging final yr, resulting in heavy losses in first half of 2022-23 fiscal yr earlier than easing oil costs propelled them to profitability.
Additionally Learn | Excessive oil costs to weaken profitability of three PSU oils corporations, says Moody’s
Worldwide oil costs have firmed up since August, resulting in margins of three retailers turning unfavorable once more.
“Excessive crude oil costs will weaken the profitability of the three state-owned oil advertising corporations in India — IOC, BPCL and HPCL,” Moody’s stated in a report.
“The three corporations can have restricted flexibility to go on increased uncooked materials prices by rising the retail promoting costs of petrol and diesel within the present fiscal yr due to upcoming elections in Might 2024.”
The OMCs’ advertising margins — the distinction between their internet realized costs and worldwide costs — have already weakened considerably from the excessive ranges seen within the quarter ended June 30, 2023 (1Q fiscal 2024). Advertising and marketing margins on diesel turned unfavorable since August whereas margins on petrol have narrowed significantly over the identical interval as worldwide costs elevated.
“The rise in uncooked materials prices comes after the worth of crude oil jumped round 17% to greater than $90 per barrel in September, from a mean of $78 a barrel in 1Q fiscal 2024,” Moody’s stated. “An extension in manufacturing cuts by the Group of the Petroleum Exporting Nations (OPEC) of round 1 million barrels a day till December 2023, mixed with Russia’s prolonged export cuts of round 300,000 barrels a day over the identical interval have pushed oil costs increased.”
Nonetheless, excessive oil costs are unlikely to be sustained for lengthy as international progress weakens, it stated.
“The decline within the OMCs’ advertising margins has been mitigated to some extent by the rise in gross refining margins (GRMs). The benchmark Singapore GRMs have improved since June partly attributable to continued progress in liquid fuels consumption within the area in addition to deliberate refinery outages which constrained the availability of petroleum merchandise within the area,” it stated.
The rankings company anticipated GRMs and worldwide costs of transportation fuels to average in subsequent quarters as considerations over China’s financial slowdown dampen demand whereas provide will increase as refineries come again on-line after the completion of scheduled upkeep actions.
“Though a smaller hole between worldwide and home costs will scale back advertising losses for the OMCs, their total profitability will stay weak as retail promoting costs will possible stay unchanged,” it added.
After very robust earnings in April-June quarter, OMCs’ working efficiency is predicted to weaken over the following 12 months as oil costs stay at present elevated ranges.
“Nonetheless, the three corporations’ fiscal 2024 (April 2023 to March 2024) earnings will stay robust and better than historic ranges, even when crude oil costs stay at present ranges of $85 per barrel to $90 a barrel within the second half of fiscal 2024.
“That is attributable to the OMCs’ exceptionally robust earnings in 1Q fiscal 2024. The three corporations’ EBITDA within the first quarter alone was near their common annual EBITDA for the previous couple of years,” Moody’s stated, including the OMCs will begin incurring EBITDA losses within the second half of fiscal 2024 if crude oil costs improve to round $100.
Sturdy advertising margins for petrol and diesel drove the strong working efficiency in 1Q fiscal 2024.
OMCs’ internet realised costs on sale of diesel and petrol have largely remained unchanged since April 2022 although feedstock prices had declined steadily. The value of Brent crude declined to $78 per barrel (bbl) in 1Q fiscal 2024 from $112 in 1Q fiscal 2023.
Among the many three OMCs, IOCL and BPCL are higher positioned to resist any additional improve in crude oil costs, in comparison with HPCL, the score company stated, including the distinction within the OMCs’ capability to soak up a rise in feedstock prices stems from the distinction of their enterprise profiles.
IOCL’s and BPCL’s larger-scale operations and a excessive diploma of integration between their refining and advertising segments enable them to climate the impression of opposed adjustments within the working surroundings. IOCL’s presence in petrochemicals and pipelines additionally displays its enterprise diversification. In the meantime, HPCL’s smaller scale and a better dependence on its advertising operations make it extra weak to any unfavourable worth actions.
“Sturdy earnings in 1Q fiscal 2024 and decrease crude oil costs in contrast with fiscal 2023 have decreased the OMCs’ working capital necessities and allowed them to scale back their borrowings over the previous few months. In consequence, we count on leverage, as measured by debt/EBITDA, for all of the three corporations to stay effectively positioned in contrast with the score thresholds by means of fiscal 2024. That is regardless of capital spending and shareholder funds remaining excessive and rising crude oil costs leading to elevated working capital necessities within the interval,” it stated.
In the meantime, the Indian authorities’s ₹30,000 crore in capital help for the oil advertising sector introduced within the finances earlier this yr will increase money flows for the OMCs and partially cowl their capital spending wants. To this impact, IOCL and BPCL have already introduced rights points to the federal government.
Moody’s stated it has nevertheless not factored this into its projections because the timing and quantum of such proceeds stay unsure at the moment.