Operational losses of OMCs expected to shrink in Q3, say analysts

Public sector OMCs reported cumulative losses of Rs. 27,276 crore during the first six months of FY23

After two tight quarters of profit-margin shrinkage due to global volatility, Indian oil-marketing companies (OMCs) are expected to see reduction in operational losses in the October-December quarter (third quarter, or Q3) of 2022-23 (FY23), observed analysts.

This will come about as a result of lower marketing losses and higher gross refining margins (GRMs) as global disruption in crude oil supplies continues, they added.

From late November onwards, blended marketing margins for petrol and diesel have begun to recover. Margins rose to a 10-month high of about Rs 2.5 per litre in December, said analysts.

The marketing margin on petrol has improved to nearly Rs 10 per litre in Q3FY23 after posting a loss in the preceding two quarters.

“Blended losses in Q3 are expected to come down to Rs 3 versus Rs 8.7 in the second quarter,” said Avishek Datta, research analyst, Prabhudas Lilladher.

Based on current trends, OMCs are expected to see blended marketing profits (currently Rs 1.5 per litre) in the fourth quarter, he added.

Higher GRMs

In recent months, losses in the marketing segment have also been partially offset by record-high GRMs in FY23.

GRM is the amount refiners earn from turning every barrel of crude into refined fuel products.

Average GRMs for Q3 have sustained at $13-16 per barrel for the three OMCs, said ICICI Securities.

Indian Oil Corporation (IndianOil) has been the biggest beneficiary of high GRMs, while the highest marketing leverage has put Hindustan Petroleum Corporation (HPCL) in the most disadvantageous position, Motilal Oswal Research pointed out in a recent note.

With the supply of refined products reducing as a result of supply disruptions in Russia and the lower export of petroleum products from China, Indian refiners have seen their earnings go up.

Case in point being the benchmark Singapore GRM hitting a record high $11.4 per barrel in FY23.

Logistics issues on the supply side remain a major headache for OMCs like IndianOil, Bharat Petroleum Corporation, and HPCL, as the diplomatic stand-off between the Western nations and Russia continues to harden in the wake of the war in Ukraine.

Challenges remain

Notwithstanding improvement in marketing margins, the overall operational losses will be upwards of Rs 7,200 crore in Q3, said Dutta.

According to calculations by ICICI Securities, OMCs are expected to clock a combined operating loss of Rs 31,500 crore in the marketing segment in the current financial year (FY23).

Public sector OMCs have reported cumulative losses of Rs 27,276 crore during the first six months of FY23 against a profit before tax of Rs 28,360 crore in the same period of 2021-22, the government informed Parliament.

This was primarily due to underrecoveries or the difference between the retail selling price and the international rate for petrol, diesel, and liquefied petroleum gas.

Crude prices hit record highs in Calendar 2022, while pump prices remained unchanged.

While the average price of the Indian basket of crude increased 102 per cent (from $43.34 to $87.55 per barrel) between November 2020 and November 2022, the retail prices of petrol and diesel increased in India by only 18.95 per cent and 26.5 per cent during this period, respectively.

As a result, state-controlled oil refiners incurred average marketing losses of Rs 9.5 per litre on diesel and Rs 0.1 per litre on petrol in FY23 so far, according to Motilal Oswal.