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Indian oil marketing companies (OMCs) are likely to see an increase in its operating profit at Rs 1 lakh crore in the current financial year compared with an average operating profit of about Rs 60,000 crore registered between fiscals 2017 and 2022, and thrice last fiscal’s low of Rs 33,000 crore, according to CRISIL Ratings.
The rise in operating profit is expected to improve the industry’s credit metrics, which declined in the past few years due to subdued profitability and higher capital expenditure, according to analysis of three OMCs analysed by CRISIL Ratings.
The rating agency stated that the gross refining margins stood at an average $15 per barrel in fiscal 2023, helped by strong global demand, especially for diesel, as prices of alternative fuels such as natural gas surged and the European Union imposed sanctions on Russian products.
Further, crude oil prices soared and averaged at about $94 per barrel for the fiscal, while the higher crude prices were not accompanied by higher retail prices, which have remained unchanged since May 2022. This led to marketing losses of about Rs 8 per litre despite strong refining margins and limited the overall profitability of oil marketing companies last fiscal.
However, crude oil prices witnessed a steady fall as the last financial year progressed and aided the oil marketing companies to post robust earnings in the fourth quarter of last fiscal compared to operating loss in the first quarter of last fiscal, CRISIL Ratings noted.
‘Marketing margins could veer to an operating profit of Rs 5-7 per litre, while gross refining margins may moderate to $6-8 per barrel as global product demand-supply imbalance eases. This forecast is predicated on crude oil price averaging ~$80 per barrel and no cut in retail pump prices,” said Naveen Vaidyanathan, Director, CRISIL Ratings.
Capex Boost
The rating agency said that the sector has seen a substantial rise in capital expenditure of about Rs 3.3 lakh crore between fiscals 2017 and 2023 for expansion of capacities in downstream refining and petrochemicals, product pipelines and marketing infrastructure. Consequently, gross debt more than doubled from Rs 1.2 lakh crore in fiscal 2017 to Rs 2.6 lakh crore in fiscal 2023, even as profitability remained subdued. Hence, the rating agency said that a rebound in operating profit is critical to meet the rising capital expenditure. It added that the capex will continue to be high this fiscal and it is estimated at Rs 54,000 crore.
“Despite continued capex, improved profitability should help shore up the standalone credit metrics of OMCs from last fiscal’s low levels. For instance, interest coverage could improve to 7.4 times versus 2.4 times last fiscal,” said Joanne Gonsalves, Associate Director, CRISIL Ratings.
Further, the rating agency observed that credit profiles continue to be underpinned by implicit government support due to the strategic importance of the sector. Equity rights issues by the OMCs, currently being planned for capex, will also support credit metrics.
Moreover, higher-than-expected crude oil prices, or any decline in retail fuel prices without a corresponding fall in crude oil prices could alter the expectations, the rating agency said. Besides, volatility in crude oil prices that can lead to inventory losses, and foreign exchange losses due to sharp rupee weakening will bear watching, according to CRISIL Ratings.