India’s oil marketing companies (OMCs) could see operating profit rebound to Rs 1 lakh crore this fiscal, compared with an average of ~Rs 60,000 crore between fiscals 2017 and 2022, and thrice last fiscal’s low of Rs 33,000 crore.

The higher profitability would help improve the sector’s credit metrics, which had weakened significantly in the past few fiscals amid muted profitability and significant capital expenditure (capex).

An analysis of three OMCs rated by CRISIL Ratings, accounting for the entire sector, indicates as much.

The government-owned OMCs earn from two businesses: refining, where they earn a gross refining margin which is the value of refined products at the refinery gate minus the cost of crude oil used to produce them; and marketing, where they earn a margin on petrol, diesel and other petroleum products sold mainly through retail pumps.

Fiscal 2023 saw record gross refining margins averaging $15 per barrel. Global demand, particularly for diesel, was strong as prices of alternative fuels such as natural gas soared and the European Union imposed sanctions on Russian products.

But soaring crude oil prices, which averaged $94 per barrel for the fiscal, were not accompanied by higher retail prices, which have remained unchanged since May 2022. What that meant was, despite strong refining margins, marketing losses were a steep Rs 8 per litre, which kept the overall profitability of OMCs weak last fiscal.

Fortuitously, there was a steady fall in the price of crude oil as last fiscal progressed, which helped OMCs swing from an operating loss in the first quarter to strong profits in the fourth quarter.

Says Naveen Vaidyanathan, Director, CRISIL Ratings, “This fiscal should see a switch in the growth drivers. Marketing margins could veer to an operating profit of Rs 5-7 per litre, while gross refining margins may moderate to $6-8 per barrel as global product demand-supply imbalance eases. This forecast is predicated on crude oil price averaging ~$80 per barrel¹ and no cut in retail pump prices.”

The rebound in operating profit is critical for the sector that has seen a significant increase in capex — as much as ~Rs 3.3 lakh crore between fiscals 2017 and 2023 — to expand capacity in downstream refining and petrochemicals, product pipelines and marketing infrastructure.

Consequently, gross debt more than doubled from Rs 1.2 lakh crore in fiscal 2017 to Rs 2.6 lakh crore in fiscal 2023, even as profitability remained subdued.

Capex will continue to be high this fiscal and is estimated at Rs 54,000 crore.

Says Joanne Gonsalves, Associate Director, CRISIL Ratings, “Despite continued capex, improved profitability should help shore up the standalone credit metrics of OMCs from last fiscal’s low levels. For instance, interest coverage could improve to 7.4 times versus 2.4 times last fiscal.”

Credit profiles continue to be underpinned by implicit government support, given the strategic importance of the sector. Equity rights issues by the OMCs, currently being planned for capex, will also support credit metrics.

That said, higher-than-expected crude oil prices, or any decline in retail fuel prices without a corresponding fall in crude oil prices could alter the expectations. Moreover, volatility in crude oil prices, which can lead to inventory losses, and forex losses due to sharp rupee depreciation will bear watching.

¹ Brent crude oil prices