Revisions in fuel retail price come as a relief for oil marketing companies
2 min read 11 Jun 2020, 06:16 PM ISTAnalysts maintain consistent price hikes would help OMCs make reasonable marketing margins, reflecting in earnings
PremiumAfter a 12-week pause, state-owned oil marketing companies (OMCs) started revising auto fuel prices on a daily basis this week. OMCs include Bharat Petroleum Corp. Ltd (BPCL), Hindustan Petroleum Corp. Ltd (HPCL) and Indian Oil Corp. Ltd (IOC). The increase in retail prices comes as a relief to OMCs, as estimated marketing margins were quite low recently. In fact, price hikes were the need of the hour.
As Amit Shah, head of research at BNP Paribas India, points out, “In our view, daily price revisions had to resume sooner than later. It doesn’t make sense for OMCs to absorb higher oil prices (like it did in 2018), especially given the plan to divest BPCL, which remains a priority amid the current fiscal situation."
The government intends to wrap up the BPCL divestment in this calendar year and has extended the expression of interest deadline from 13 June to 31 July.
If price hikes are consistent and in keeping with the uptick in crude prices, marketing margins are expected to gradually reach normal levels. Note that OMCs were estimated to be clocking substantially high margins before excise duty hikes were imposed in early May. Even so, demand is improving slowly as the economy opens up and that is helpful. Analysts maintain consistent price hikes would help OMCs make reasonable marketing margins and that should reflect in earnings.
Further, it goes without saying that an improvement in refining margins will be crucial as well. In the short run, the refining outlook is expected to remain subdued. From a medium-term perspective, though, the operating environment is likely to improve with demand expected to increase on the gradual opening up of the world economy.
Overall, investors will look for an earnings recovery in this financial year. It offers some comfort that the earnings of OMCs in FY21 are expected to be better than in FY20. Indian refiners are expected to report inventory gains in the current quarter versus inventory losses in the March quarter. Nitin Tiwari, analyst at Antique Stock Broking Ltd, said, “OMCs’ earnings for FY21 may well turn out to be better compared to FY20 owing to inventory gains and the strong marketing margins that these companies made in the previous months."
This assumes that the covid-19 outbreak doesn’t surprise negatively again during the course of the year and crude prices remain broadly stable.
In short, as long as crude prices behave and the covid-19 situation doesn’t worsen hereon, the worst could well be over for OMCs.
Meanwhile, valuations are not demanding. Shares of all the three OMCs have declined in the range of 22-30% year-to-date.
“Current valuations were last seen in October 2018 on the back of the government of India’s intervention as OMCs bore the ₹1 per litre cut on excise duties as crude prices peaked at $85 per barrel," BNP Paribas’ Shah added.
