The decision to freeze retail prices of petrol and diesel despite a steep rise in crude oil prices have weighed on state-run oil marketing companies (OMCs) that reported losses for a second consecutive quarter, taking their total losses to a staggering Rs 3805.73 in the first half of the financial year 2022-23.
Indian Oil Corporation Limited (IOCL), Hindustan Petroleum Corporation Limited (HPCL), and Bharat Petroleum Corporation Limited (BPCL) reported consolidated loss for another quarter at Rs 3805.73 crore in July-September as they struggled with low marketing margin on the sale of petrol, diesel and domestic liquefied petroleum gas (LPG). The central government’s one-time grant of Rs 22,000 crore for the three companies to compensate them for the losses made on LPG was not enough to make up for the losses.
“IOCL’s year-on-year performance was hit by retail marketing loss of Rs 1/ litre for petrol and Rs 13 / litre for diesel in Q2FY23, coupled with an estimated Rs 30 billion inventory loss during the quarter,” said ICICI Securities in a report. On October 29, IOCL reported a net loss of Rs 991.55 crore in the second quarter compared to a net profit of Rs 6,203.74 crore in the same period last year.
Similarly, HPCL and BPCL also posted losses of Rs 2475.69 crore and Rs 338.49 crore, respectively, in the quarter. In the first half of the current fiscal, the three OMCs posted a consolidated loss of Rs 18790.17 crore. In the April-September period, IOCL posted a loss of Rs 1270.93 crore while HPCL and BPCL reported a loss of Rs 11032.81 crore and Rs 6486.43 crore, respectively.
The Price Freeze
Petrol & Diesel Rates Yesterday
OMCs typically revise retail petrol and diesel prices daily, based on the rolling average of international benchmark prices over the past 15 days. But earlier this year, they left prices unchanged despite soaring crude oil prices, which dented their bottom line.
While prices of fuel sold to bulk consumers and aviation turbine fuel were raised earlier this year, retail prices of petrol and diesel were left unchanged for almost 137 days. The OMCs resumed increasing the prices only from March 22 but even then the retail price increase was not in line with the increase in crude prices, in an attempt to keep inflation in check in the country.
Union Minister of Oil and Natural Gas Hardeep Singh Puri has repeatedly said that OMCs require more time to recoup losses they have incurred.
Brokerages have predicted weak performance of OMCs due to uncertain conditions such as geopolitical tensions and volatile oil prices.
Crude prices slumped on November 8 due to recession concerns as Brent crude was at $96.99 a barrel while U.S. West Texas Intermediate (WTI) crude was at $90.63.
“We note the near-term outlook for the OMCs remains weak and fraught with uncertainty across segments. The recent weakness in refining eased some pressure on marketing margins, leading to blended margins averaging - Rs 5/litre in October 2022 vs -Rs 9/litre in 2Q. However, with crude prices likely to remain elevated in the near-term and OMCs unable to raise auto-fuel prices, marketing margins will be impacted in FY24F as well,” said Nomura in a report.
Despite the challenges and a weak outlook, brokerages believe that the second half of the fiscal may turn out to be better than the first half for the OMCs driven by strong margins in the refining business.
“With relatively lower marketing losses and still robust double-digit gross refining margins, we do expect earnings to dramatically improve over H2FY23E,” ICICI Securities said in a report on IOCL on October 31.
Brokerage Nomura downgraded HPCL shares to “Reduce” from “Neutral.” ICICI Securities, too, downgraded HPCL to “Reduce” with the target price unchanged at Rs 186 per share.
On November 7, shares of HPCL closed at Rs 209.80 on BSE, up 3.05 percent from the previous close.
“HPCL is on track to raise its refinery capacity meaningfully by 9mtpa for its standalone Mumbai/Vizag refineries and another 4-5mt capacity to come via its share in Rajasthan refinery (HMEL). We also assume MRPL’s 12mt capacity to merge with HPCL by FY24E, raising the refining scale substantially. However, weak marketing margin prospects, coupled with rising leverage and moderation in GRMs, keep us cautious,” said ICICI Securities.
ICICI Securities maintained ratings of IOCL with a target price of Rs 85 per share. Shares of IOCL closed on November 7 at Rs 70 on BSE, compared to the current market price of Rs 68.45 per share.
Bourses were closed on November 8 for the occasion of Guru Nanak Jayanti and Kartik Purnima.
HDFC Securities has cut the earnings per share estimates for IOCL. “We cut our FY23/24 EPS (earnings per share) estimates by 9/8 percent to Rs 11.3/13 to factor lower crude throughput for FY23, higher debt resulting in higher interest cost and higher other expenses; however, the same was offset marginally by higher marketing volume estimates,” said HDFC Securities.All eyes would be on BPCL shares on November 9 which reported its result after market hours on November 7, when the shares of the company closed at Rs 309.60 on BSE.