Oil marketing companies (OMCs) are expected to see their operating profit grow more than 50% to $18-20 per barrel this financial year from around $12 last financial year. This is driven by stronger marketing margin on account of stable retail fuel prices and favourable crude oil dynamics, Crisil Ratings said on Friday.
OMCs earn from two businesses—refining and marketing. In refining, they earn gross refining margin (GRM) and in marketing, they earn from margin on petrol, diesel and other petroleum products sold.
The Margin Shift:
This financial year, the improvement in marketing margin will more than offset a moderation in refining margin owing to slow growth in global demand for fossil fuels as the world transitions towards cleaner energy sources, Crisil said. The resultant healthy accruals will support capital expenditure (capex) plans of OMCs, strengthening their credit metrics, it added.
An analysis of public-sector OMCs rated by it, accounting for nearly 90% of the sector revenue, indicates as much. “Over the past five fiscals, geopolitical uncertainties have impacted oil prices, while retail fuel prices have been rangebound. As a result, operating profit of OMCs has dipped to as low as $0.13 per barrel in FY23, when oil prices averaged $93 per barrel, and peaked at about $20 per barrel in FY24, when oil prices softened to $83 per barrel,” it said.
While annual margins have fluctuated, they have ultimately normalised to around $11 per barrel. In FY25, OMCs’ operating profit of around $12 per barrel was in line with the decadal industry average. With crude oil prices averaging $79 per barrel, GRM was $6 per barrel and so was marketing margin (Rs 3 per litre), it said .
“This fiscal, crude prices, though volatile, are likely to soften to $65-67 per barrel. GRM is expected to remain modest at $4-6 per barrel as moderate global demand and energy transition trends weigh on refining spreads. Amid this, unchanged retail fuel prices will boost marketing margin to around $14 per barrel (around Rs 8 per litre), resulting in overall margin improving more than 50% to $18-20 per barrel,” said Anuj Sethi, senior director, Crisil.
Accruals and Capex
The higher overall return will drive up cumulative cash accrual to Rs 75,000-80,000 crore this fiscal as compared to Rs 55,000 crore last fiscal, which will support the nearly Rs 90,000 crore capex plan of OMCs, largely towards brownfield capacity expansion. Notably, no major capacity addition is expected globally, except in emerging economies such as India and West Asia, it said.
About 80% of the budgeted capex is directed towards addressing domestic demand for petroleum and petrochemical products, while the remainder is earmarked for product pipelines, marketing infrastructure and green-energy initiatives, it said.
Joanne Gonsalves, associate director, Crisil, said, “While the industry’s capex trajectory continues, healthy profitability will limit reliance on external debt. Hence, the ratio of debt to earnings before interest, tax, depreciation and amortisation (Ebitda) for OMCs in our portfolio is expected to improve to 2.2 times this fiscal from 3.6 times last fiscal. The credit profiles will continue to be supported by the sector’s strategic importance and benefits arising from government ownership.”
Any significant production cuts or escalation in geopolitical uncertainties will bear watching as they could impact crude oil prices, thereby altering our expectations.