Gaurav Garg
After the announcement of Q2 FY20 results, most of the OMCs announced below estimate bottomline along with muted revenues. Factors that impacted performance were low demand, lower diesel to petrol price parity and struggling auto sector. Let’s look at these in detail to get a perspective.
Crude oil prices surged briefly after explosive drones cut Saudi Arabia’s oil production by half, but it remained in lower range for most part of the quarter. In Q2, Brent Crude prices traded in the range of $57-$70 a barrel. Brent Crude closed at $62.22 on November 11th, 2019. Lower crude prices generally mean, higher GRMs and in turn higher profitability for OMCs.
Indian economy grew at its slowest pace in more than four years in the March quarter and the risk of a wider fiscal deficit threatens government spending as private investment falls, leaving the outlook for infrastructure and construction activities to be uncertain over the near to medium term.
IOC's PAT declined by 12.16 percent at Rs 1.51 lakh crore, despite revenue increasing 38 percent.
HPCL's quarterly profit fell 3.7 percent and sales dropped 9.5 percent to Rs 66,165 crore, mainly because of lower product prices during the quarter.
BPCL's results came at a time when the Indian government was planning to sell stake. Profitability was boosted by a tax reversal of Rs 580.3 crore. Revenue from operations decreased 9.48 percent to Rs 75,057 crore in Q2 of this fiscal as against Rs 82,924 crore in Q2FY19. The profit would have been lower than analysts’ expectation but it benefited from a one-time tax reversal.
Among all three OMCs, BPCL’s results were impressive.
The government's ambitious target to make up to 30 percent of auto sales through electric vehicles by 2030 may also dent diesel demand. Still, over long-term India's overall growth trajectory is expected to support fuel demand.
A slowdown in demand growth in India has put pressure on OMC’s refining profit margins. According to industry body, Society of Indian Automobile Manufacturers (SIAM), transportation has historically accounted for two-thirds of India's diesel use, but a steady decline in diesel's discount to petrol (because of removal of subsidy and increase in taxes) has seen sales of diesel-powered cars fall to a record low share of total sales.
Diesel-powered cars accounted for 19 percent of total car sales in India in the FY 2018-19, compared with nearly 50 percent of sales in FY 2012-13. In 2010, on an average, diesel traded at a discount of Rs 23 per litre in comparison to petrol but now the difference is less than Rs 7 per litre.
In line with current economic situation, the stress in automobile sector, sluggish demand of diesel cars over petrol cars, Government’s thrust on the adoption of electric vehicles, non-inclusion of petrol and diesel under GST are a few factors which are going to continue putting pressure on the profitability of OMCs for at least next 2 quarters. However, fast-track divestment or strategic partnerships with global players can help OMCs.
(The author is Head of Research at CapitalVia Global Research Limited – Investment Advisor.)
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