BackIcra predicts poor fiscal year for oil marketing companies
Refiners import and stock crude for processing and record inventory losses when prevailing prices fall below the price at which stocks were purchased
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Mumbai: Ratings agency Icra Ltd on Wednesday predicted that crude oil inventory losses will weaken profitability of state-owned oil refiners during this financial year.
Refiners such as Indian Oil Corp. Ltd, Bharat Petroleum Corp. Ltd and Hindustan Petroleum Corp. Ltd import and stock crude for processing and record inventory losses when prevailing prices fall below the price at which stocks were purchased.
In a note released on Wednesday, ICRA Research, the research division of ICRA Ltd, noted that oil refiners sustained inventory losses worth ₹ 30,000 crore in the third quarter, after international crude oil prices fell about 40% during that quarter.
As a result, the companies will not only close the current financial year with large inventory losses, it may also have a negative impact on the next financial year.
K. Ravichandran, senior vice-president and co-head, corporate ratings, ICRA Ltd, said, “...GRMs (gross refining margins) are expected to remain subdued in FY15 on account of large inventory valuation losses, though partly offset by higher crack spreads (price difference of crude and refined products) witnessed during the second half of the year for several products. Moreover, exchange losses are also expected to be sizeable due to depreciating INR vs USD."
He, however, said the silver lining lies in the falling under-recoveries, which are leading to decrease in borrowing levels and interest burden thereby resulting in improvement in profitability and liquidity position of the OMCs.
Besides, the fall in under-recoveries is also resulting in significant fall in the subsidy burden of the government as reflected by the 38% (y-o-y) fall in the compensation by the government during the first nine months of the current financial year.
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