Cut in fuel prices may make ₹9,000 crore dent in oil retailers’ profits
OMCs lost a combined ₹39,000 crore in market capitalization on Thursday, post the government’s announcement
Mumbai: The government’s decision to offer a relief from rallying auto fuel prices will likely lead to a ₹9,000 crore hit in net profits of state-run oil marketing companies (OMCs)—Indian Oil Corp. Ltd (IOCL), Bharat Petroleum Corp. Ltd (BPCL) and Hindustan Petroleum Corp. Ltd (HPCL), said two people familiar with the matter.
The decision also led to a plunge in shares of these companies.
The government on Thursday cut prices of petrol and diesel by ₹2.50 a litre each wherein it factored in an excise duty reduction of ₹1.50 per litre and asked the OMCs to absorb ₹1 per litre on sales of petrol and diesel respectively.
The two people said the OMCs would take a collective hit of ₹9,000 crore in the next two quarters, half of which will be borne by IOCL and the remainder split equally between BPCL and HPCL.
“All this while the government maintained that they will not interfere with fuel pricing regardless of the crude oil behaviour. But, now it has bitten the bullet. We do not know what will happen when crude climbs further up,” said an official from one of the OMCs on condition of anonymity.
IOCL, BPCL and HPCL did not respond to emailed queries till press time.
On Thursday, a litre of petrol cost ₹84 in Delhi while diesel was at ₹75.46 a litre. In Mumbai, petrol cost ₹91.34 a litre and diesel cost ₹80.10 a litre.
Retail prices of petrol and diesel in India are linked to their prices in global markets and not that of crude oil. That gives the demand-supply situation of finished products in global markets some effect in the retail price of auto fuels here.
Despite that, crude oil, which accounts for about 90% of the cost of these refinery products, is the biggest determinant of the retail price of fuel.
In June 2017, the OMCs switched to daily price revision from a fortnightly pricing system as the government sought to further the pricing reforms in the sector when prices remained subdued. Crude oil fetched $46.96 a barrel then. Today crude oil was hovering at around $85.91 a barrel.
The government’s move was not received well by investors on worries their earnings would be impacted. The OMCs lost a combined ₹39,000 crore in market capitalization on Thursday. The BSE Sensex fell more than 800 points and rupee ended at a fresh low of 73.58 a dollar, 0.33% lower than Wednesday’s close of 73.34.
“Earnings of marketing segment of OMCs will be negatively impacted as they will have to absorb ₹1/litre on the auto fuel price, which will result into sharp decline in the auto fuel marketing margin,” said Abhijeet Bora, senior research analyst at Sharekhan by BNP Paribas.
Bora said that in the rising oil price scenario and sharp depreciation of the rupee, the government may continue to partially regulate auto fuel prices given several state elections scheduled in 2018-2019 and national elections due in May 2019.
To set prices of petrol and diesel, domestic oil companies consider trade parity pricing, which is determined based on prevailing prices of these products in the international market. The pricing formula involves 80% of import price and 20% export price of the fuel. To the trade parity price, other elements such as dealer commission, excise duty and value added tax are added.
Rating agency ICRA Ltd in a statement said at an industry level, the government step will lead to loss of margins of Rs 70-72 billion on auto fuel sales.
“This would impact the morale of private fuel retailers who were aggressively expanding their retail network and the reversal of auto fuels price deregulation policy will also hit the investor sentiment in the sector,” ICRA said.