Higher capex amid weak operating margins could increase leverage for OMCs
1 min read 10 Sep 2019, 12:13 PM ISTOil marketing companies have planned a capital expenditure of ₹2.9 trillion over the next five yearsOf the ₹2.9 trillion planned spend, the companies are expected to incur a capital expenditure of ₹1.2 trillion in refining alone
PremiumMumbai: A jump of nearly ₹1 trillion in capital expenditure over the next five years could increase the leverage for oil marketing companies, Indian Oil Corporation Ltd (IOCL), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL), struggling with weak operating margins, said analysts.
The oil marketing companies (OMCs) have planned a capital expenditure of Rs2.9 trillion over the next five years compared with Rs1.8 trillion spent between financial years 2015 and 2019.
"While we believe that capex in new and expansion projects would gradually enhance refining complexity and diversify product yields, we are cautious on the near-term prospects, as operating margins are weak and aggressive capex has led to greater leverage," said Centrum Broking in a research report dated 6 September.
Of the Rs2.9 trillion planned spend, the companies are expected to incur a capital expenditure of Rs1.2 trillion in refining alone, led by IOCL and HPCL for upgradation of refineries to comply with BS-VI regulations, integration of petchem units at multiple refineries, and capacity expansion.
Additionally, HPCL is setting up a greenfield 9mtpa refinery and a 2mtpa petchem unit at Barmer, Rajasthan, for Rs431 billion.
In a bid to diversify and cut dependence on transportation fuels, OMCs are also planning a significant capex of ₹400 billion for the petchem segment aimed at integration of larger refineries with petchem capacities, enabling them to enhance product yields and diversify revenue mix.
"Additionally, the fact that direct benefit transfer of LPG payouts from the government have started to lag significantly, it creates working capital stress, raising near-term interest costs. With higher capex and debt, we expect leverage to remain high, depressing return ratios and profitability for the next 12-18 months," Centrum Broking said.
