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Home / Markets / Mark To Market /  Stagnant petrol, diesel prices to weigh on the outlook of oil marketing firms

Shares of Bharat Petroleum Corp. Ltd (BPCL) and Hindustan Petroleum Corp. Ltd (HPCL) fell to a 52-week low on Wednesday on the National Stock Exchange amid weak broader markets. The stocks did not improve much and ended Thursday’s session close to their respective lows, while shares of Indian Oil Corp. Ltd (IOCL) were just 6% above the 52-week lows seen in August.

State-run oil marketing companies (OMCs) are squeezed by the lack of hikes in auto fuel prices on the one hand and high crude oil prices on the other. OMCs have not revised retail petrol and diesel prices adequately for a while now, despite higher oil prices. Benchmark Brent crude oil is hovering around $120 per barrel. This has meant that estimated gross marketing margins on diesel and petrol have slipped well into the negative territory in FY23 so far.

OMCs would incur losses if the current under recoveries persist for the rest of the year, analysts said. This would also add to the challenges the government faces. “The government has the unenviable task of managing (1) the finances of the downstream oil PSUs, all of whom will make massive losses in FY23 at current levels of under recoveries on diesel and oil, (2) its fiscal position, already weakened by lower excise duties on diesel and petrol," said analysts from Kotak Institutional Equities in a report on 13 June. Inflation levels are also elevated with upside risks if crude prices rise further. Note that the excise duty cuts effective 22 May have been passed on to consumers.

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Kotak estimates total under recoveries on diesel and gasoline at 1.8 trillion for FY23 at current levels of global oil prices and domestic retail prices. This analysis estimates marketing margins on diesel and petrol at a negative 12.2 per litre and 16.4 per litre, respectively.

Valuations of shares of OMCs appear to be capturing these concerns. Shares of HPCL, IOCL and BPCL trade at 0.60 times, 0.67 times and 1.05 times estimated price-to-book ratio for FY24, respectively, based on Bloomberg data.

“Valuations for OMCs are inexpensive. However, the wider concern is that petrol and diesel prices are not being revised in sync with global prices. In a way, OMCs appear to have slipped back into the regulated era, with immediate focus on protection of consumer interest and concerns linked to inflation in the economy, rather than shareholder interest," said Nitin Tiwari, analyst at Yes Securities Ltd.

There is a glimmer of hope, though. Refining margins are solid. Benchmark Singapore gross refining margins (GRMs) are more than $20 a barrel. The average for the June quarter so far is more than $20 per barrel as well. For Indian refiners, things could turn out better. “Reports suggest that India is importing some of its crude oil requirements from Russia at a discount. This implies that refining margins for Indian companies are far higher than what Singapore GRMs indicate as it is based on Dubai crude prices," said Probal Sen, energy analyst at ICICI Securities Ltd.

Even so, investors would track the extent to which the refining margins will offset the weakness in the marketing segment of OMCs. HPCL’s vast marketing exposure makes it more vulnerable.

“Over the course of FY23, investors will watch if crude oil prices decline, resulting in a fall in refining margins. Of course, lower crude prices improve the marketing margin outlook as well," according to Sen.

Against this backdrop and other uncertainties, lower valuations of the OMC stocks don’t offer much comfort. Sen sums up the outlook for the stocks well: “While valuations of OMCs’ stocks are attractive, investors are not going to be excited if these companies are not allowed to change retail prices freely."

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