After registering a weak beginning to the financial year, state-run oil marketing companies (OMCs) are expected to report marginal improvement in their gross refining margins in the second quarter of the present fiscal 2024-25 on the back of higher availability of Russian crude oil that is priced relatively cheaper, analysts say.
In the first quarter of FY25, the three oil marketing companies – Indian Oil Corp, Bharat Petroleum Corp, and Hindustan Petroleum Corp reported weak earnings owing to lower gross refining margins. Furthermore, the reduction in fuel prices slashed the company’s marketing margins. The state-owned oil marketing companies had earlier cut auto fuel prices by Rs 2 per liter, first time after April 2022.
“The YoY/QoQ earnings dip (of oil marketing companies) was due to lower GRM and marketing margin with higher crude prices, but we expect crude oil to correct in Q2FY25,” said Elara Capital in its report.
“HPCL’s integrated margin (EBITDA per tonne of refining & marketing volume) fell 56%/6% YoY/QoQ on weaker retail gasoline/diesel gross margin, with higher crude oil price. Per sensitivity analysis, every $1 per barrel dip in oil price may improve integrated margin by Rs 285 per tonne, implying July 2024 estimated margin of Rs 3,900 per tonne,” it said.
The OMCs made under recoveries on LPG in Q1FY25. However, LPG being a controlled product, analysts remain hopeful of financial support to OMCs from the government. Motilal Oswal has cut its FY25 EBITDA and net profit estimates by 23% and 35% respectively for HPCL owing to LPG under recovery. “We conservatively account for these losses now, though potentially OMCs could receive financial assistance related to LPG in due course of time,” it said. The brokerage expects BPCL’s GRMs to recover to normalized levels by 2QFY25 end.
OMCs are currently estimated to be generating a marketing margin of Rs 6.9 and Rs 4.9 per liter on petrol and diesel respectively, as per Motilal Oswal. For the full year FY25, analysts see crude prices now to remain range bound at current levels which may limit the refining margin hit to the OMCs.
“We remain positive on oil marketing companies. We expect OMCs to earn above-historical integrated margin at below $83 per barrel crude oil, so as to fund the next five years estimated at nearly Rs 6 trillion capex of OMCs, where energy transition capex comprises 30%,” said Elara Capital.
Even as healthy refining margins might be able to support growth of the three OMCs in the Jul-Sep quarter, any additional profitability for them will depend upon cheaper crude sourcing, higher share of value added products in the product slate, and better spreads of non-auto fuel products and volume growth.
Moreover, while the first quarter of the current fiscal witnessed a blip, FY25-FY26 may see sustained earnings improvement due to targeted investments in improving scale and complexity of downstream business by the OMCs, their diversification, and a likely improvement in margins, analysts say.
