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Business News/ Market / Mark-to-market/  Lower refining margins may hurt oil companies’ profits in June quarter
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Lower refining margins may hurt oil companies’ profits in June quarter

Singapore GRMs fell to $6 per barrel in June quarter, which may be reflected in RIL, Essar Oil performance

For state-run companies, there is a glimmer of hope, as under-recoveries or losses on selling fuel below cost are expected to decline compared with the March quarter, thanks to the consistent diesel price hikes. Photo: BloombergPremium
For state-run companies, there is a glimmer of hope, as under-recoveries or losses on selling fuel below cost are expected to decline compared with the March quarter, thanks to the consistent diesel price hikes. Photo: Bloomberg

The financial results of Indian oil companies for the June quarter are unlikely to inspire much confidence. Singapore gross refining margins (GRMs), an important benchmark and a measure of profitability for refiners, were lower on a sequential basis.

According to Religare Institutional Research, Singapore GRMs in the June quarter declined to about $6 per barrel (March quarter: $6.3 a barrel) owing to weaker middle distillates ($15 per barrel in the June quarter versus about $18 per barrel in the March quarter). This is likely to be reflected in the performance of refining companies such as Reliance Industries Ltd (RIL) and Essar Oil Ltd.

Of course, for Essar Oil, the other factor to watch out for is whether its debt situation and the resultant interest burden have reduced. For RIL, the petrochemicals business is important as well. Unfortunately for investors, the situation is not rosy on that front either. Analysts at IDBI Capital Research expect Ebit (earnings before interest and taxes) margins of RIL’s petrochemicals business to contract marginally to 8.5%. RIL’s petrochemicals business’s Ebit margin in the March quarter and June 2013 quarter stood at 8.6%. And yet again, contribution from RIL’s oil and gas business is most likely to disappoint, thanks to its production problems. However, investors will keenly await management commentary on its gas business given the fact that the gas price hike was postponed recently.

For state-run companies, there is a glimmer of hope, as under-recoveries or losses on selling fuel below cost are expected to decline compared with the March quarter, thanks to the consistent diesel price hikes. Moreover, “LPG under-recoveries declined to 460 per cylinder (Q4FY14: 675 a cylinder) as global LPG prices cooled off on lower demand from petchem crackers due to outages," pointed out Religare in its earnings preview.

While the decline in under-recoveries augurs well, the profitability of oil marketing companies—Bharat Petroleum Corp. Ltd (BPCL), Hindustan Petroleum Corp. Ltd (HPCL) and Indian Oil Corp. Ltd (IOC)—also depends on the subsidy burden that the upstream oil companies and the government decide to bear. In general, the oil marketing companies’ stocks are driven more by reform announcements than financial performance. In fact, these stocks have been in favour in 2014 mostly on account of ongoing reforms (such as the diesel price hikes) and expectations of further reforms in the sector.

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ABOUT THE AUTHOR
Pallavi Pengonda
Pallavi is a deputy editor at Mint and heads the Mark to Market team. This column covers wide-ranging topics related to the stock markets, offering an in-depth analysis of financial reports of companies. She writes and edits across verticals, covering the breadth of the Indian stock market. Pallavi has done her master of management studies, specializing in finance.
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Published: 07 Jul 2014, 06:37 PM IST
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