OMCs to feel the pinch of inventory losses in Q3 too

If oil prices remain soft, it would lead to large inventory valuation losses for downstream companies

Inventory losses on crude oil stocks that had hurt the balance sheets of Oil Marketing Companies (OMCs) in the second quarter will continue to impact their financials in the third quarter as well; and the impact would only be stronger this time. 

The impact on OMCs' bottomline is a crucial collateral damage from falling crude prices.

Global crude price benchmarks have slid by as much as 30% in the third quarter alone. If the prices remain soft until the end of the quarter, it would lead to large inventory valuation losses for downstream companies. 

“Consequently, Gross Refining Margins are expected to be negative or remain subdued in third quarter on account of large inventory valuation losses, though partly offset by higher crack spreads witnessed during the quarter for several products,” said K Ravichandran, senior vice president at ratings agency ICRA.

The country’s largest refiner, Indian Oil Corporation (IOC) had reported a loss of Rs 898 crore in the second quarter ended September as against a net profit of Rs 1,600 crore in the corresponding period last year. This was mainly due to inventory loss of Rs 4,272 crore as compared to an inventory gain of Rs 4,635 crore in second quarter last fiscal, as global oil prices slumped from $111 per barrel to $95 per barrel. 

Now, with prices having dipped below $65 per barrel, OMCs are keeping their fingers crossed.

However, the outlook is not all bearish for OMCs. With the implementation of the modified DBTL scheme, OMCs would be allowed to sell domestic LPG at market price while the subsidy will be directly transferred to the accounts of customers. However, there is no clarity on the sharing of LPG subsidies to be borne under modified Direct Benefit Transfer (MDBTL) as the government is yet to fix subsidy (in Rs per cylinder) for itself and upstream companies.

According to ICRA, the OMCs may be exposed to small under recoveries in the interim period depending upon international LPG prices and forex rate, which eventually may be shared by the government. Nevertheless, the issues related to delay in release of cash compensation to the OMCs would materially reduce for LPG subsidies, which would be around two-thirds of total subsidies from FY16 onwards. 

“If MDBTL is successfully implemented, the OMCs could witness material fall in working capital intensity, thereby leading to reduction in short-term debt levels and improvement in liquidity position,” Ravichandran said.  

The government, however, seems to have emerged a major beneficiary from the falling crude rates so far. The diesel price decontrol coupled with the dip in crude prices gave the government the opportunity to announce two hikes in excise duty rates in quick succession last month. The single measure would boost its revenue by Rs 10,000 crore in the rest of the current fiscal and Rs 27,000 crore next financial year.

In addition, an estimated Rs 10,000 crore savings are set to accrue from the move to plug subsidised LPG leakages through the modified Direct Benefit Transfer in LPG. Under-recoveries would also be cut owing to the planned move to provide subsidised kerosene only to un-electrified households, which could lead to reduction in kerosene consumption too. Even un-electrified households using kerosene for lighting purpose may be provided cash subsidy by the government. These steps may also reduce the diversion of kerosene for diesel adulteration, which could reduce the leakage related to kerosene subsides.