The government’s decision to reduce petrol and diesel prices by Rs 2.50 per litre, where oil marketing companies (OMCs) will absorb Rs 1 per litre, is seen as credit negative for the OMCs as their operating profits are expected to fall by Rs 6,500 crore in FY19.
International ratings agency, Moody’s in a report said that public sector OMCs – Bharat Petroleum Corporation (BPCL), Hindustan Petroleum Corporation (HPCL) and Indian Oil Corporation’s (IOC) – combined earnings before interest, tax, depreciation and amortisation (EBITDA) for FY19 will go down by Rs 6,500 crore which is 9% of their total EBITDA of Rs 69,200 crore in FY18 following the government decision.
However, despite the negative earnings impact, the three OMCs will report higher EBITDA in FY19 compared with FY18 given higher sales volume, stable refining margins and the depreciating rupee. It should be noted that OMCs derive their operating profits in US dollar as the selling price of most of the petroleum products are linked to international markets.
Still, the ratings agency believes going ahead, the credit metrics of the OMCs will weaken as their borrowings will increase at a faster pace than their EBITDA. Increased borrowings will be driven by rupee depreciation, higher working capital requirement due to elevated oil prices, and the ongoing capital spending on expansions.
“The increase in borrowings could be lower if the OMCs decide to defer their capital spending and lower their dividend payments in fiscal 2019 and beyond. Credit metrics of BPCL and HPCL could weaken below our downgrade thresholds for their respective standalone profiles, while IOC’s credit metrics will remain well positioned for its standalone profile,” Moody’s said.
CRISIL Research, said in a note, the hit of Rs 1 per litre to be absorbed by OMCs, will impact their operating profits by Rs 3,000- Rs 3,500 crore in Q3FY19 year-on-year (y-o-y), while margins will be hit by 100-130 basis points y-o-y.
Prasad Koparkar, senior director, CRISIL Research, said “As things stand, average gross marketing margins of the OMCs on diesel and petrol have come off from around Rs 3 per litre in the closing quarter of fiscal 2018 to around Rs 2.60 per litre in the second quarter this fiscal due to the uptrend in crude prices. Given this, our calculations indicate that the Rs 1 per litre blow will shave 100-130 basis points off the OMCs’ operating margins and a Rs 3,000-Rs 3,500 crore decline in operating profits this quarter.”
“With marketing margins already on a decline, the companies could be looking at a 15% dent in operating profits this quarter and a further 18% drop in the next quarter as well, assuming the government decides to extend the marketing margin hit,” the CRISIL Research note added.