Fuel price cut: Combined market capitalisation of OMCs sees 10% wipeout

Sharp impact likely on their earnings, with duty cut absorption to hit marketing margin

Investor sentiment got a major jolt with the central government telling the three state-owned oil marketing companies (OMCs) to absorb a Re 1 a litre cut in excise duty on petrol and diesel.

The share prices of Hindustan Petroleum (HPC), Bharat Petroleum (BPC) and Indian Oil (IOC) closed 10.6 to 12.2 per cent lower on Thursday, after also seeing their 52-week low. Their combined market capitalisation fell by Rs 298 billion or nearly 10.89 per cent of what it was at Wednesday’s close. HPC, being more sensitive to automobile fuel retail prices, since it has the highest proportion of sales from these among the three, was the largest loser. A senior OMC official told Business Standard the absorption of Re 1 a litre each on petrol and diesel woud have an adverse impact of Rs 45 bn on the profit of these companies for the remaining part of the financial year. 

“Earnings of the marketing segment of these companies will be negatively impacted, which will result in a sharp decline in the auto fuel marketing margin,” said Abhijeet Bora at brokerage Sharekhan. 

Analysts say the OMCs had a marketing margin of Rs 1.5-2 a litre on petrol and diesel on a normalised basis. From this, Re 1 might be wiped off. On an annualised basis, the combined impact on their profits could be close to Rs 85 billion, says Nilesh Ghughe at HDFC Securities. 

In value terms, IOC, having diversified businesses in petrochemicals, refining, pipelines, etc, contributing to its sales, would probably see a lower proportionate impact on profit. Comparatively, HPC, with the highest proportion of sales from fuel retailing, could see the highest proportional impact on operating profit and earning. 

An analyst at a domestic brokerage estimated HPC’s operating profit would be hit by 26 per cent for 2019-20, followed by BPC at 23 per cent and IOC by 13 per cent. Fuel retailing contributes a very small proportion of Reliance Industries’ sales. Even so, analysts feel it could face a challenge on pricing at its retail stations.

The decision by the government could be seen as a rollback on the decontrolled pricing of petrol and diesel, which took effect in petrol during 2010 and on diesel in 2014. In the rising oil price scenario and sharp fall in the rupee's value, the government might continue to partially regulate automobile fuel prices, with several state elections scheduled in 2018-2019 and the national election due in May 2019. “We, thus, continue to believe that earnings of OMCs would remain volatile in the near to medium term,” adds Bora.

The Indian basket of crude oil prices was $84.43 a barrel on Thursday, while the rupee hit a new low of 73.77 to the dollar. Every Re 1 fall against the dollar will result in an increase on the import bill by $2 bn. Industry sources said this would worsen the current account deficit and have a more negative impact on retail prices.

“Our estimates suggest today’s move will translate in a 3.79 per cent decline in retail prices of petrol and a 3.88 per cent decline in retail prices of diesel (based on prices and taxes in Delhi). The impact of this retail inflation would be nine basis points (bps). A matching cut in value-added tax by state governments would result in retail inflation declining by 16 bps,” said Devendra Kumar Pant, chief economist at India Ratings and Research (Fitch Group).

A further increase in international crude oil prices will add pressure on the OMCs.

Every $1 increase in crude’s price demands an increase of 63p a litre in prices of both diesel and petrol, while a Re 1 depreciation against the dollar’s exchange rate requires a 50p a lire rise in both fuels. “There is no plan to put a brake on the daily pricing system on petrol and diesel,” said an OMC official.