OMCs likely to see a short-term bounce-back on improved Q3 showing

Given the concerns around biz, though, a full turnaround is unlikely anytime soon

The Department of Investment and Public Asset Management (DIPAM) secretary recently announced that dividends payable by (public sector undertakings) PSUs may be impacted this year by losses in the oil marketing companies (OMCs).

This is also likely to further delay the possibility of disinvestment of Bharat Petroleum Corporation Limited (BPCL). But the price of crude and gas has been moderating in the third quarter of the 2022-23 financial year (Q3FY23) and this in turn could lead to better conditions.

However, it is to be borne in mind that a series of assembly elections and the General Election may probably lead to OMCs being asked to keep prices down by the majority shareholder, which would negatively impact FY24.

Crude and gas prices have been pretty high since the Ukraine War. However, while the Q1 FY22 average price of the Indian basket was $109.49 per barrel, Q2 prices averaged $97.87, Q3 stood at $85.78 and January 23 is running at $78.18 (January 1-15). So prices have trended down by over 30 per cent and may be going down, or stabilising, as global demand tapers off in the face of a growth slowdown or recession. 

The Q3 should see a combination of lower crude prices and better refining margins, leading to better performances by the OMCs. However, there is no clarity on compensation of under-recoveries already sustained and there’s also no clarity on effective curbs on free pricing.

Marketing margins jumped for petrol and LPG in Q3, while diesel under-recoveries were reduced quarter-on-quarter (QoQ). BPCL and Hindustan Petroleum Corporation Limited or HPCL should report profit after tax (PAT) of Rs 1,800 crore and Rs 900 crore, while IOCL (Indian Oil Corporation Limited) should report reduced net loss of Rs 1,400 crore. IOCL will probably see a sizeable inventory loss. Upstream, Oil and Natural Gas Corporation (ONGC) and OIL India Limited (OIL) should report 15-25 per cent Ebitda (earnings before interest, tax, depreciation and amortisation) improvement but reported PAT may decline. 

Looking forward, oil demand which was impacted by China lockdowns apart from recession fears, may see some recovery on China reopening. Curbs on Russian crude exports to Europe remain, and OPEC (Oil and Petroleum Exporting Countries) may decide to cut production again to try and balance reduced demand. But Russian exports to Asia are rising although the price curbs of $60 per barrel for Russian crude sold to the European Union will also give Asian buyers leverage to bargain down Russian crude prices. 

As such, crude prices will remain elevated but assumptions range between $85-95 for FY24 rather than earlier assumptions of $105-plus. Given lower crude prices, stable to strong refining margins, the fears about marketing losses are now lower. OMCs now have profit margins on petrol. Compared to Rs 1.1 trillion of under-recoveries in the first half (H1) of FY23, the H2FY23, may see much lower under-recoveries of Rs 15,000 crore. 

Given that petrol and diesel are officially deregulated, OMCs may receive no compensation for the losses however. For past LPG losses (June-2020 to June-2022), the government gave one-time compensation of Rs 22,000 crore in H1FY23.

Although OMCs are reportedly seeking a further compensation of Rs 50,000 crore, but it’s unlikely that the government will pay. Just on LPG alone, non-compensated under-recoveries amount to around Rs 32,000 crore. However, LPG prices have also fallen steeply from the peak levels of Q1FY23 and under-recoveries would be negligible in Q3.  

BPCL has seen a 49 per cent rise in net debt to Rs 48,200 crore (September 2022) from Rs 32,300 crore (March 2022). HPCL has also seen debt up to Rs 68,500 crore from Rs 43,200 crore.

All three -- IOCL, BPCL and HPCL -- will see reduced losses but they will still be in loss for the full FY23. Analyst calculations of Fair Value are around Rs 80 for IOCL (up from Rs 58 after Q2), Rs 310 for BPCL up from Rs 255, and Rs 200 for HPCL (earlier Rs 160). There may be a short-term bounce back, given the improved results but it’s hard to see a full turnaround.