Ind-Ra: Daily Fuel Price Revisions to Boost OMCs' Marketing Margins

The government's recent decision to move to a daily fuel price revision for petrol and diesel is likely to result in improvement in the marketing margin per litre and thus the profitability of Oil Marketing Companies (OMCs), says India Ratings and Research (Ind-Ra). This move is another positive structural changes initiated by the government in the downstream sector. The other structural changes include the petrol deregulation in 2010, the diesel de-regulation in 2014, direct benefit transfer for LPG, give-it-up scheme for LPG, lowering the allocation of PDS kerosene, hike in prices of kerosene and the decline in crude prices had resulted in a decline in the gross under-recoveries. The diesel and petrol de-regulation had also resulted in an increase in the marketing margins for OMCs.

The increase in marketing margins per litre for the OMCs namely Indian Oil Corporation (IOC, 'IND AAA'/Stable), Hindustan Petroleum Corporation (HPCL, 'IND AAA'/Stable), and Bharat Petroleum Corporation (BPCL) will be driven by a) greater flexibility with OMC's to pass on the crude price volatility to the end-consumers at a higher frequency b) lower need for steep price hikes that was seen in the fortnightly pricing regime and thus lowering the possibility of political intervention and c) lower hoarding by the dealers in anticipation of price rises which resulted in probably a bigger share of inventory gains on the marketing segment at the dealer level rather than at the OMC level.

However, an increase in the marketing margins could also result in an increase in competition from private sector owned retail outlets and hence OMCs may balance the marketing margins to limit competition.

The OMC's will be free to change the prices of petrol and diesel on a daily basis, in-line with global best practices as against the current fortnightly price revision. In the current regime, the OMCs revise the rates on the 1 and the 16 of every month, based on the average price of crude and the exchange rate in the preceding 15 days. In the US, where the prices are revised on a daily basis the maximum upward price change was 60paisa/litre, while the maximum downward revision was 50paisa/litre with a median change of around 1paisa/litre in FY17. However, in India, the maximum upward price change during FY17 was INR3.38/litre, while the maximum downward revision was INR2.25/litre for petrol prices in Delhi.

Initially, the pilot for the daily price revision will be launched in Puducherry, Vizag in Andhra Pradesh, Udaipur in Rajasthan, Jamshedpur in Jharkhand and Chandigarh and gradually extended to other parts of the country.

Over the last three to four years, the downstream sector has seen a slew of structural changes which have helped the OMCs to reduce their short-term borrowings and consequently the interest burden substantially. In the last two years FY14-FY16, gross borrowing of PSU OMCs have fallen 29% and interest cost has consequently declined by 37%.

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