More financial pain in the offing for OMCs, upstream companies: CRISIL

Rs 35 billion profit hit in Q3 for OMCs, higher under-recovery burden seen to hit upstream too

State-run oil marketing companies (OMC)s may be staring at just the start of multiple woes, with the rise in crude oil prices and the government effort to contain the retail impact. According to rating agency Crisil, OMCs will take a Rs 35 billion hit on operating profit in the December quarter. With a higher under-recovery burden, both upstream and OMCs may see further financial strain.

“As things stand, average gross marketing margins of the OMCs on diesel and petrol have come off from Rs 3 per litre in the closing quarter of fiscal 2018 to Rs 2.60 per litre in the second quarter this fiscal, due to the uptrend in crude prices. Given this, our calculations indicate that the Re 1 per litre blow will shave 100-130 basis points off the OMCs’ operating margins and a Rs 30-35 billion decline in operating profits this quarter,” said Prasad Koparkar, Senior Director, Crisil Research.

In terms of percentage, Crisil expects oil marketing companies to take a 15 per cent dent in operating profits for the December quarter and a further 18 per cent drop in the March quarter as well, assuming the government decides to extend the marketing margin hit.

What could be more worrisome in addition to the Ebitda hit due to price absorption is the impact in terms of under-recoveries. “This might just be the beginning of their tale of woes considering the ballooning crude oil prices are estimated to push up the under-recovery burden on LPG and Kerosene by Rs 200 billion to Rs 220 billion year on-year to Rs 420 billion to Rs 470 billion,” according to Crisil.

With the rise in under-recoveries, the rating agency expects upstream companies to feel the heat too.
 

“(Under–recoveries) threaten to upset the fiscal math as the government had budgeted Rs 249 billion for under-recoveries this fiscal. The remaining burden might thus have to be borne by upstream companies ONGC and Oil India, considering the OMCs are already taking a blow on their marketing margins in this round. And should the OMCs also be asked to share the under-recovery burden, it would impact their overall margins further,” said Rahul Prithiani, Director, Crisil Research.