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Record high margins on fuel sales cut OMCs debt

The global crude benchmark has climbed 22% so far this year after Saudi Arabia announced deep output cuts, helping swollen global stockpiles to normalize even as the rapid spread of Covid-19 led to more lockdowns. (REUTERS)Premium
The global crude benchmark has climbed 22% so far this year after Saudi Arabia announced deep output cuts, helping swollen global stockpiles to normalize even as the rapid spread of Covid-19 led to more lockdowns. (REUTERS)

  • In 2020, the Indian government raised excise duty on petrol and diesel by 13–16 per litre, an increase of 65–100% year-on-year despite average crude prices declining 35% on year to $42 per barrel

MUMBAI: Retail prices of fuel have touched an all-time high, and so have the marketing margins of oil marketing companies--Indian Oil Corp. Ltd. (IOCL), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL)--strengthening their profitability and trimming debt.

As of now, daily gross marketing margin on diesel/petrol stands at over Rs3 per litre.

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"Even as retail prices for auto fuels in India touch record highs, OMCs are earning marketing margins of 2.8-3.6 per liter on petrol-diesel (higher than their long-term average of 3 per liter) due to regular price hikes," said Motilal Oswal in a 22 February note.

Prices of petrol and diesel were steady across the country for the second consecutive day on Monday. They were last revised on Saturday, with petrol prices raised by 24 paise per litre and diesel hiked by 15 paise in the national capital.

Price of petrol in Delhi stands at 91.17 per litre while that of diesel is at 81.47. In Mumbai, petrol costs 97.57, while diesel is retailing at 88.60, according to data available on Indian Oil Corporation’s website.

"With Brent crossing $65 per barrel, another Rs2.2-2.4 per litre hike in pre-VAT (value added tax) prices is required over the coming fortnight," said Emkay Research in a note dated 23 February.

In 2020, the Indian government, to shore up revenues hit by the coronavirus pandemic, raised excise duty on petrol and diesel by 13–16 per litre, an increase of 65–100% year-on-year despite average crude prices declining 35% on year to $42 per barrel.

OMCs, however, have managed to protect their margins well despite the excise duty hike.

The debt OMCs hold on their books has also come down drastically by the end of third quarter of this fiscal. While IOCL’s debt was at Rs725 billion against 1,165 billion at the end of FY20, BPCL’s had an outstanding of Rs248 billion compared with Rs419 billion at the end of FY20. HPCL’s debt stood at 333 billion against 430 billion at end of FY20.

The government, through excise duty, and OMCs through gross marketing margins have been using margins on auto fuels as a key tool to manage their finances. Handsome marketing margins are also helping the OMCs offset the weakness in gross refining margins (GRM). GRMs have been impacted due to weakening product cracks and increasing crude oil prices.

During the third quarter, IOCL reported a GRM of $2.2 per barrel versus $8.6 in Q2FY21, BPCL reported $2.5 versus $5.8 and HPCL reported $1.9 versus $5.1. However, core GRMs excluding inventory gains were lower at $1.2 for IOC, $1.2 for BPCL and negative $1.0 for HPCL.

In India, taxes constitute 57–62% of retail price, with excise accounting for 39–43%. "This leaves huge room for the government to reduce the excise duty when crude oil prices are high," added Motilal Oswal.

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