Indian fuel retailers face margin pressure

India’s State-owned oil marketing companies — Indian Oil Corporation Limited, Bharat Petroleum Corporation Limited, and Hindustan Petroleum Corporation Limited — are under pressure from rising global crude and gas prices, limited domestic fuel price pass-through, and dependence on imported energy, global rating agencies said.

India imports 88 per cent of its crude and nearly half its natural gas, with 30-55 per cent of supplies passing through the Strait of Hormuz. Strategic petroleum reserves cover just 10 days of consumption, while commercial stocks provide around 65 days, leaving OMCs exposed to supply disruptions.

S&P Global Ratings, Moody’s Investors Service, and Fitch Ratings, in separate notes, detailed the impact of the widening West Asia conflict, triggered by the US and Israel launching attacks on Iran and Tehran retaliating.

Fitch said a prolonged Iran-related oil or LNG supply shock could pressure near-term credit metrics, although Government backing provides strong support. Retail fuel prices in India have largely remained unchanged since April 2022, reflecting Government influence and OMCs’ dominant market share of nearly 90 per cent of fuel outlets.

Moody’s highlighted that limited domestic price adjustments shift rising input costs onto the companies, compressing marketing margins and weakening cash flow, particularly during periods of sustained high energy prices.Past spikes, such as after the Russia-Ukraine conflict, caused temporary losses that were partly offset when crude prices later eased.

The Indian Government has directed refiners to maximise LPG output amid West Asia supply disruptions and raise domestic LPG prices by INR 60 per 14.2 kg cylinder.Fitch and Moody’s noted that losses from below-market LPG sales may be compensated through budgetary allocations; a prior INR 30,000 crore package for fiscal 2024-25 is being disbursed in monthly instalments.

Standalone refiners, including Reliance Industries, may see mixed impacts from higher crude prices, initially benefiting from inventory gains, but facing potential refinery run cuts if supply constraints persist.

“India will remain dependent on maritime routes to fulfil its crude needs, but there is some scope for diversification. The country has a history of buying oil from outside Asia, such as from Russia and South America. Purchases from Russia currently stand at 1.1 million barrels per day, while those from Venezuela resumed last month at 142,000 bpd,” S&P Ratings said.

Stating that Government directives and rising prices may drive down margins, it said the three fuel retailers may need to maintain steady retail prices for petrol and diesel to curb inflationary pressures.

“Their margins could suffer as a result,” it added.“The Government may use budgetary allocations and excise duty cuts to ease resulting pressures on the OMCs, as it has done during the Russia-Ukraine conflict, but the likelihood of such measures remains uncertain.”

Moody’s Ratings said domestic retail prices of fuels have remained largely steady since April 2022, despite swings in global oil and gas prices and the country’s high dependence on imports. “The companies will bear rising input costs from higher energy prices without

corresponding increases in selling prices because the Government’s influence over retail pricing prevents timely cost pass-throughs.” When international prices rise, procurement and refining costs increase, while OMCs’ realised prices for key fuels do not adjust in line with costs. This gap compresses marketing margins and weakens operating cash flows, particularly during periods of sustained high energy prices, Moody’s Ratings said.

Fitch Ratings said oil marketing companies (OMCs) and GAIL (India) Limited face cash flow pressure from prolonged oil and gas supply disruption tied to the Iran conflict.

“An extended closure of the Strait of Hormuz or sustained high oil prices beyond a few quarters could pressure issuers’ near-term credit metrics and Standalone Credit Profiles (SCPs), although ratings will remain supported by strong Government linkages and state support.”

Among rated OMCs, BPCL currently has the most balance-sheet buffers to absorb a prolonged supply disruption and/or feedstock price increase, while IOC and HPCL also have adequate SCP headroom.

“In the event of a prolonged disruption, we expect the Government will strike a balance between maintaining adequate financial profiles at OMCs alongside its responsibilities for managing domestic inflation and fiscal policy, as demonstrated in the past, which mitigates risks,” it said.