State-run oil marketing companies' (OMCs) combined net profit fell significantly in the quarter ended March 31 from a year earlier, led by inventory losses and lower gross refining margins (GRMs).
Despite rising crude oil prices, the three Indian state-run fuel retailers—Indian Oil Corp. Ltd (IOCL), Bharat Petroleum Corp. Ltd (BPCL) and Hindustan Petroleum Corp. Ltd (HPCL)—have left pump prices unchanged, impacting their profits.
Moneycontrol examines the factors that impacted the oil marketers and their expectations of their performance during the coming months.
How was OMCs’ performance affected in Q4?
In the March quarter, Indian Oil reported a 49 percent decline in its consolidated net profit at Rs 5,487.92 crore as compared to Rs 10,841.23 crore last year. Similarly, BPCL and HPCL posted 30 percent and 25 percent declines in their consolidated net profits, respectively.
The slump comes due to elevated and volatile crude oil prices in the period, and decline in GRMs. GRM, or gross refining margin, is the difference between the prices of the refined petroleum product and crude oil, or the profit earned on turning each barrel of crude oil into refined product.
Post-results, Indian Oil communicated to Moneycontrol that the slump in profit was primarily due to inventory losses in the quarter compared to gains in the previous three months.
What causes inventory losses in OMCs?
Before the refiners process crude oil in their refineries, they tend to store or hold inventory for about 45-60 days. OMCs incur inventory losses when the price of crude oil bought by the companies falls by the time it is processed and sold in the market.
In India, retail fuel prices are linked to the rolling average of international benchmark prices over the past 15 days. OMCs have, however, left the retail fuel prices unchanged for over two years but slashed fuel prices in March ahead of national elections.
The oil refiners had cut petrol and diesel prices in the country in mid-March by Rs 2 per litre, affecting the company’s marketing margins as crude oil prices gained momentum since then amidst geopolitical tensions. Crude oil prices gained 16 percent in the first quarter of calendar year 2024.
What was the impact of inventory losses on OMCs?
To be sure, since Indian Oil has the highest refining capacity among all the three companies, inventory losses would have been higher for IOCL as against BPCL and HPCL. Indian Oil has, however, not disclosed its inventory losses.
In a call with investors after its Q4 earnings, BPCL said its marketing inventory loss was around Rs 750 crore in the quarter while HPCL said inventory losses were to the tune of Rs 600 crore in the quarter.
What is expected from OMCs in coming quarters?
OMCs are expected to maintain steady margins in the current quarter, with crude oil prices settling around $80-82 per barrel amid supply-demand equilibrium and the reduced impact of geopolitical tensions on oil prices. “We maintain our constructive stance on OMCs led by a steady marketing outlook as the general elections pan out and despite the volatile refining scenario. We raise FY25-26E EPS by 15-20% each, on better marketing margins and below operating-line adjustments,” said Emkay Global Financial in a note post BPCL results.
With crude oil prices cooling to around $80 per barrel, marketing margins of the OMCs are expected to improve.
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