The weak refining margins that weighed on the state-owned oil marketing companies’ profitability in Q4FY24 against last year is yet again likely to result in a subdued earnings for the country’s downstream sector in the first quarter of the current financial year 2024-25.
Even though oil prices have moderated now, the peak witnessed in the global oil prices in the beginning of FY25 is likely to lead to muted refining performance of OMCs in Q1FY25, analysts say.
“Singapore gross refining margin has been weak so far in Q1FY25 till date at $3.6 per barrel as against $7.3 per barrel in Q4FY24, which may lead to muted refining performance in Q1FY25,” said Motilal Oswal in its report.
Coupled with the weak refining margins was the cut of Rs 2 per litre in retail prices of auto fuels by the OMCs earlier this year. Analysts, however, believe that the government will allow them to tweak auto fuel pump prices once the elections are over.
The three OMCs were able to register a strong ending to the financial year 2023-24 but may see a marginally weaker FY25 in terms of its Return on Equity.
“We expect FY25 to be weaker than FY24 (where OMCs earned Return on Equity of 31-47%) but still expect OMCs to earn normative ROE of 16-22%,” HSBC Global Research had said in its review.
For OMCs as a group, the fourth quarter of FY24 turned out to be the weakest quarter in terms of reported profitability largely driven by poor performance by Indian Oil Corp which disappointed on gross refining margins and losses in petrochemicals, the firm noted.
As per analysts at HSBC, any additional profitability for the OMCs in the coming quarter 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.
For the full year FY25, analysts see crude prices now to remain range bound at current levels which may limit the margin hit to the OMCs.
Presently, the gross refining margins for OMCs are lower owing to the weakness in diesel demand, tightness in heavy crude market, and stronger supply from China.
In FY24, Indian Oil Corp lost its market share a bit while Hindustan Petroleum Corp gained market share as it pushed its product in the market,” HSBC noted in its report. BPCL maintained its market share during the fiscal.
While the first quarter of the current fiscal may see 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.