Petrol, diesel margins back above pre-conflict levels: Report

Profitability at state-run oil marketing companies (OMCs) is set to improve as falling crude oil prices lift fuel marketing margins, although rising debt levels and uncertainty over fuel taxes could limit the sector’s longer-term earnings outlook, according to a JP Morgan report.

Composite margins on petrol and diesel sales at state-run refiners and fuel retailers are now above levels seen before the recent Middle East conflict, with gains driven by lower crude prices and reduced central excise duties, it said.

The start of the West Asia conflict triggered a surge in global oil prices but retail pump rates in India remained steady for large parts and rising only by a fraction of the required increase. Even after the Rs 7.50 per litre increase in petrol and diesel prices in May, retail pump rates were lower than the cost.

“Our estimates for OMC composite margins on petrol and diesel are now higher than pre-war levels. Losses on LPG are still elevated, but should also start to track oil down soon,” JP Morgan said, adding earnings in April-June - the first quarter of current fiscal year - will likely be hurt by large inventory losses, but 2Q profitability should be better.

“Two issues limit our excitement around this improvement in margins: the OMC will have acquired material debt during the last few months - affecting valuations, and a major part of the restoration of profitability is on account of the reduction in excise duties,” it said.

“It is possible that the Government keeps taxes low for some time - permitting debt repayment at the OMC. The risk of an eventual increase in excise duties remains.”

The Government had cut excise duty on petrol and diesel by Rs 10 per litre each in March to avoid an immediate increase in retail prices. The duties may be restored once global oil prices fall to pre-war levels and stabilise.

Among the three state-run OMCs - Bharat Petroleum Corporation Limited, Indian Oil Corporation and Hindustan Petroleum Corporation Limited - BPCL and IOC are expected to benefit the most in the near term if oil prices continue to ease.