 "OMC profits could reach Rs 1 trillion this financial year: CRISIL Ratings")
India's oil marketing companies (OMCs) are poised for a substantial operating profit rebound this financial year, with estimates suggesting it could reach Rs 1 trillion according to analysis by CRISIL Ratings. This comes as a promising development compared to the average of approximately Rs 60,000 crore recorded between financial years 2017 and 2022 and the previous financial year's low of Rs 33,000 crore.
The expected surge in profitability is likely to bolster the sector's credit metrics, which had faced challenges in recent years due to muted profitability and substantial capital expenditure (capex). CRISIL Ratings analysed three OMCs representing the entire sector, signaling an optimistic outlook.
The government-owned OMCs generate revenue from two key areas: refining and marketing. In the refining segment, they earn a gross refining margin (GRM), which is the value of refined products at the refinery gate minus the cost of crude oil used for production. In the marketing segment, they earn a margin on petrol, diesel, and other petroleum products sold mainly through retail pumps.
In the financial year 2023, the sector experienced record GRMs averaging $15 per barrel. Robust global demand, particularly for diesel, driven by rising prices of alternative fuels like natural gas and EU sanctions on Russian products, contributed to this favorable situation. However, despite strong refining margins, soaring crude oil prices, averaging $94 per barrel for the financial year, led to marketing losses of Rs 8 per litre. Consequently, the overall profitability of OMCs remained weak.
Thankfully, crude oil prices gradually declined as the financial year progressed, enabling OMCs to transition from an operating loss in the first quarter to strong profits in the fourth quarter.
Naveen Vaidyanathan, Director at CRISIL Ratings, anticipates a shift in growth drivers this financial year.
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Vaidyanathan stated, “This fiscal should see a switch in the growth drivers. Marketing margins could veer to an operating profit of Rs 5-7 per litre, while gross refining margins may moderate to $6-8 per barrel as global product demand-supply imbalance eases. This forecast is predicated on crude oil price averaging ~$80 per barrel and no cut in retail pump prices.”
The rebound in operating profit holds particular significance for the sector, given the significant increase in capex, which amounted to approximately Rs 3.3 trillion between financial years 2017 and 2023. This capital expenditure was directed towards expanding capacity in downstream refining, petrochemicals, product pipelines, and marketing infrastructure. As a result, gross debt more than doubled from Rs 1.2 trillion in the financial year 2017 to Rs 2.6 trillion in financial year 2023, despite subdued profitability.
Although capex is set to remain high this financial year, estimated at Rs 54,000 crore, Joanne Gonsalves, Associate Director at CRISIL Ratings, is optimistic that improved profitability will bolster the standalone credit metrics of OMCs.
Gonsalves said, “Despite continued capex, improved profitability should help shore up the standalone credit metrics of OMCs from last fiscal’s low levels. For instance, interest coverage could improve to 7.4 times versus 2.4 times last fiscal.”