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Business News/ Industry / Energy/  Daily price change, higher margins to boost profitability of oil firms
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Daily price change, higher margins to boost profitability of oil firms

Daily price change, higher gross refining margins and higher fuel consumption will raise the profitability of India Oil, HPCL and BPCL

The consumption of both petrol and diesel has grown 8.3% and 4.5%, respectively, in FY18 year-to-date, giving a boost to oil firms Indian Oil, HPCL and BPCL. Photo: Ramesh Pathania/MintPremium
The consumption of both petrol and diesel has grown 8.3% and 4.5%, respectively, in FY18 year-to-date, giving a boost to oil firms Indian Oil, HPCL and BPCL. Photo: Ramesh Pathania/Mint

Mumbai: Daily price change, higher gross refining margins (GRMs) and higher auto fuel consumption will raise the profitability of oil marketing companies (OMCs), analysts said.

In June, India’s three government-run oil marketing companies—Indian Oil Corp. Ltd (IOCL), Bharat Petroleum Corp. Ltd (BPCL) and Hindustan Petroleum Corp. Ltd (HPCL)—introduced dynamic fuel pricing, where fuel prices change daily depending on global oil price fluctuations.

Meanwhile, the consumption of both petrol and diesel has grown 8.3% and 4.5%, respectively, in FY18 year-to-date, giving a boost to OMCs. 

Gross refining margin refers to a company’s earnings from turning every barrel of crude into fuel.

“With superior return ratios compared with global peers, OMCs remain in a sweet spot, considering high consumption growth, potential marketing margin expansion, and low competitive intensity. We expect marketing margins of petrol and diesel to increase by Rs0.20-0.30 per litre in each of the next two years," said Motilal Oswal Research in a note on 20 September. 

The fire at Pernis refinery in Europe and Hurricane Harvey in the US removed around 3.5-4 million barrels per day of global refinery capacity.

Consequently, the crack spread on diesel/petrol/jet kerosene or jet fuel rose by $2.2/$1.5/$2.1 per barrel on a sequential basis in the second quarter of this fiscal. Crack spread is the difference between price of crude oil and petroleum products derived from it.

“Due to the sudden spike in crack spreads globally due to this disruption, which is yet to be fully normalized, the domestic refiners will gain in the form of higher gross refining margins in the near term, leading to improved profitability," said K. Ravichandran, senior vice-president and group head, corporate sector ratings, ICRA Ltd.

In the past one year, shares of IOCL have gained 41%, BPCL 16.4% and HPCL 56% on BSE.

“With greater autonomy and lower political intervention, OMCs could, over time, expand marketing margins, albeit increasing competition from private OMCs would eventually moderate that. Moreover, any intervention by the government of India, which limits the freedom of OMCs in price revisions, in light of rising fuel prices could be a credit negative," added Ravichandran.

Private companies are boosting fuel retail operations, having mopped up 5% of the market share so far.

Essar Oil Ltd, which has 3,499 retail outlets, is working to open 2,631 more.

Reliance Industries Ltd is targeting doubling its market share in fuel retail in the next two-three years as it expands the business.  

“The likely improvement in GDP (gross domestic product) rate and a moderation in retail auto fuel prices are expected to boost diesel consumption, coupled with a gradual improvement in marketing margin on diesel/petrol with implementation of daily fuel price revision from June 2017," said Sharekhan in a note dated 26 September.

The note added that for every Rs0.5 per litre increase in auto fuel marketing margin, IOCL’s Ebitda (earnings before interest, taxes, depreciation and amortization) will increase by around Rs3,200 crore.

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Published: 02 Oct 2017, 12:38 AM IST
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