Oil marketing companies (OMCs) may see operating profit rebound to Rs 1 trillion in the current financial year of 2023-24 (FY24), rising by more than three-times from FY23's low of Rs 33,000 crore, Crisil Ratings said in a research report on Tuesday.
The higher profitability would help improve the sector’s credit metrics, which had weakened significantly in the past few years amid muted profitability and significant capital expenditure (capex), Crisil Ratings said. Average operating profits for OMCs stood at Rs 60,000 crore between FY17 and FY22.
FY23 saw record gross refining margins (GRM) averaging $15 per barrel. GRM is the amount refiners earn from turning every barrel of crude into refined fuel products.
Global demand, particularly for diesel, was strong as prices of alternative fuels such as natural gas soared and the European Union imposed sanctions on Russian products. But soaring crude oil prices, which averaged $94 per barrel for the fiscal, were not accompanied by higher retail prices, which have remained unchanged since May 2022, Crisil said.
As a result, despite strong refining margins, marketing losses were a steep Rs 8 per litre, which kept the overall profitability of OMCs weak last fiscal, Crisil said. On the other hand, there was a steady fall in the price of crude oil as last fiscal progressed, which helped OMCs swing from an operating loss in the first quarter to strong profits in the fourth quarter, it added.
Government-owned OMCs earn from two businesses: refining and marketing, where they earn a margin on petrol, diesel and other petroleum products sold mainly through retail pumps.
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“This fiscal should see a switch in the growth drivers. Marketing margins could veer to an operating profit of Rs 5-7 per litre, while gross refining margins may moderate to $6-8 per barrel as global product demand-supply imbalance eases. This forecast is predicated on crude oil price averaging $80 per barrel and no cut in retail pump prices," Naveen Vaidyanathan, Director, CRISIL Ratings said.
Capex to increase
Crisil Ratings said capital expenditure will continue to be high in the current year at Rs 54,000 crore.
"The rebound in operating profit is critical for the sector that has seen a significant increase in capex as much as Rs 3.3 lakh crore between fiscals 2017 and 2023 — to expand capacity in downstream refining and petrochemicals, product pipelines and marketing infrastructure," the report said.
Consequently, gross debt for OMCs has more than doubled from Rs 1.2 lakh crore in fiscal 2017 to Rs 2.6 lakh crore in fiscal 2023, even as profitability remained subdued, it added.
Credit profiles of OMCs continue to be underpinned by implicit government support, given the strategic importance of the sector. Equity rights issues by the OMCs, currently being planned for capex, will also support credit metrics, Crisil believes.
“Despite continued capex, improved profitability should help shore up the standalone credit metrics of OMCs from last fiscal’s low levels. For instance, interest coverage could improve to 7.4 times versus 2.4 times last fiscal.” said Joanne Gonsalves, Associate Director, CRISIL Ratings said.
But higher-than-expected crude oil prices, or any decline in retail fuel prices without a corresponding fall in crude oil prices could alter the expectations. Moreover, volatility in crude oil prices, which can lead to inventory losses, and forex losses due to sharp rupee depreciation will bear watching, Gonsalves said.