CRISIL Research expects profitability of oil marketing companies (OMCs) to rebound in fiscal 2020 with crude prices unlikely to sustain at the current high levels.
And for this fiscal, rising crude oil prices are unlikely to impact operating margins as materially as the consensus expects given the cushion available in marketing margins.
Crude oil prices shot up 24% in the first three months of 2018, and touched a 40-month high in April, owing to continuous decline in global inventories driven by production cuts by the Organisation of Petroleum Exporting Countries (OPEC) and geopolitical tensions.
CRISIL Research expects crude prices to average ~$70 per barrel for calendar 2018, a 27% rise on-year. Consequently, India’s oil import bill is expected to swell ~26% to Rs 650,000 crore this fiscal.
Domestic petrol and diesel prices have peaked because of flaring crude oil prices and rising excise duties. Excise duties have risen significantly since 2013-14, accounting or 22-25% of the retail prices of petrol and diesel respectively, compared with 12-15% earlier when crude prices were at similar levels.
Any further rise in crude prices could force the government to ring-fence consumers by restraining OMCs from passing on the increases fully, especially given the political cycle. The government is not expected to reduce excise duties to influence prices, as they have to maintain their tax revenue targets for the year.
Says Rahul Prithiani, Director, CRISIL Research, “If crude price hikes are not allowed to be largely passed on to consumers, the marketing margins of OMCs will decline by 80 paise to Re 1 per litre. However, that would still be better than the Rs 1-1.5 per litre margins they have earned historically.”
Marketing margins on petrol and diesel rose as much as Rs 3-3.5 per litre in fiscal 2018 after daily pricing was introduced with effect from June 16, 2017.
Another consequence of surging crude oil is higher subsidy burden from sale of liquid petroleum gas (LPG) and kerosene. Sharing of additional under-recoveries on LPG and kerosene will reduce the profitability of OMCs by ~3-4%.
Says Prasad Koparkar, Senior Director, CRISIL Research, “Consequently, including under-recoveries, the EBITDA margins of OMCs are expected to decline 13-15% this fiscal. However, some inventory gain ($1-1.5 per barrel) in the coming quarters would provide a modicum of offset. Net-net, therefore, EBITDA margins are seen declining 8-10%.”
With crude prices expected to retract next fiscal, marketing margins would rebound and bolster the operating profits of OMCs.
This fiscal, EBIDTA margins of upstream oil companies are seen rising ~23-25% on account of higher realisations driven by increase in crude oil prices. Those numbers could rise another 1,000 basis points to 33-35% if these companies aren’t forced to share under-recoveries equally with downstream players.
The Union Budget for this fiscal has assumed the average price of the Indian crude basket (weighted average ofDubai and Oman crude, and Brent) to be $57.50 per barrel, and estimated the petroleum subsidy for the year atRs 24,900 crore.
However, with Brent crude soaring to over ~$70 per barrel now, the subsidy amount could rise to ~Rs 35,000crore on LPG and kerosene, or Rs 10,000 crore more than what has been budgeted. Historically, underrecoveriesexceeding the government’s budget has been shared equally by upstream and downstream oilcompanies.