State-owned Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) are likely to see weak earnings in current fiscal year despite fall in oil prices mainly because of losses they incurred on holding prices in the first half, Moody's Investors Service said on Tuesday.
"As international oil prices cool on economic slowdown concerns, marketing losses will ease for the three state-owned refining and marketing companies, IOC, BPCL and HPCL.
"Still, overall earnings for fiscal 2023 ending on March 31, 2023 will be weak because of marketing losses in the first half, when net realized prices did not increase as much as international prices because of fuel price caps," it said.
The three oil marketing companies (OMCs) did not change prices beginning April 6 despite cost of raw material rising. This led to the three booking a combined loss of Rs 21,000 crore during April-September 2022.
The rupee's depreciation against the US dollar further hit profits as oil prices and a large portion of refiners' borrowings are in dollars, the rating agency said.
"A decline in crude oil prices from levels earlier in the current fiscal year will lower feedstock costs and improve profitability in the next few months.
"The three companies also benefit from the continued use of Russian crude oil, which is trading at a discount to Brent crude. Nonetheless, oil prices are likely to remain volatile over the next 12 months," it said.
An escalation of the Ukraine conflict or an increase in oil demand from China following its opening would push up prices and constrain the refiners' profits.
"The companies' credit metrics will improve as earnings rise and working capital requirements ease. The companies' debt levels increased between March 2022 and September 2022 as they funded EBITDA losses through incremental borrowings," it said.
Working capital requirements also rose significantly along with crude oil prices.
"As a result, the companies' credit metrics will remain weaker than rating downgrade triggers through March 2023," Moody's said.
It said increased regulatory uncertainty will weigh on rated companies' credit strength.
"Lack of clarity on fuel pricing in India is credit negative for the refining and marketing sector. If the companies continue to incur losses from fuel price controls and are not compensated by the government in a timely and predictable fashion, their fundamental credit quality will weaken," it said.
However, their final ratings will likely remain unchanged because of a high likelihood of extraordinary government support incorporated in their ratings, it added.
Moody's said it expects marketing margins to normalize only when the refining and marketing companies' net realized prices for petrol and diesel are allowed to freely align with international prices.
"This will likely happen only in 2024 after the conclusion of general elections in India," it said. "Significant marketing losses earlier in the year will drag on earnings for the three state-owned refining and marketing companies in fiscal 2023 ending on March 31, 2023."
(Only the headline and picture of this report may have been reworked by the Business Standard staff; the rest of the content is auto-generated from a syndicated feed.)
You’ve hit your limit of {{free_limit}} free articles this month.
Subscribe now for unlimited access.
Already subscribed? Log in
Subscribe to read the full story →
Quarterly Starter
₹900
3 Months
₹300/Month
Smart Essential
₹2,700
1 Year
₹225/Month
Super Saver
₹3,900
2 Years
₹162/Month
Renews automatically, cancel anytime
Here’s what’s included in our digital subscription plans
Access to Exclusive Premium Stories Online
Over 30 behind the paywall stories daily, handpicked by our editors for subscribers


Complimentary Access to The New York Times
News, Games, Cooking, Audio, Wirecutter & The Athletic
Business Standard Epaper
Digital replica of our daily newspaper — with options to read, save, and share


Curated Newsletters
Insights on markets, finance, politics, tech, and more delivered to your inbox
Market Analysis & Investment Insights
In-depth market analysis & insights with access to The Smart Investor


Archives
Repository of articles and publications dating back to 1997
Ad-free Reading
Uninterrupted reading experience with no advertisements


Seamless Access Across All Devices
Access Business Standard across devices — mobile, tablet, or PC, via web or app