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Low crude oil prices and super normal margins on diesel have brought down debt levels of oil marketing companies like Indian Oil Corporation, Bharat Petroleum Corporation and Hindustan Petroleum Corporation to seven-year lows.
The overall debt burden of oil marketing companies (OMCs) is down to Rs 80,000 crore, from a peak of Rs 1.4 lakh crore in FY14.
Interest expenses have declined 30% from Rs 10,283 crore in March 2014 to Rs 7,190 crore in March 2015.
“Interest burden has reduced considerably and ratios like debt to equity and interest coverage ratios are now looking more comfortable,” said Nomura Research in a report.
During FY15, oil prices declined by nearly 50% from $107 per barrel at the beginning of the year to $53 per barrel at the end of FY15.
Since diesel decontrol last October, OMCs have been free from the burden of under-recoveries. As per latest data, OMCs are recording super-normal margins on diesel, averaging at Rs 1.8 per litre.
“With lower crude oil prices and no under-recoveries on diesel, our working capital requirement is down nearly 50% of what it used to be till last year. We are in fact reporting surplus working capital,” said director finance of an oil marketing company.
HPCL saw its debt reduce from Rs 33,700 crore levels in FY13 to Rs 31,900 crore levels in FY14. Additionally, the company would save Rs 500 crore in interest costs as a result of monthly diesel price hikes. It paid Rs 1,336 crore as interest payments in FY14.
The surplus working capital reported by OMCs is being deployed in treasury operations, bankers said.
“The OMCs are reporting surplus funds on hands, part of which they have deployed in short term deposits. Indian Oil Corporation, largest of state-owned OMCs, is making investment in their Canadian venture,” a senior executive at foreign bank said on the condition of anonymity.
IOCL in 2014 bought 10% stake in Petroliam Nasional’s Canadian natural gas fields and a planned export project.
An IDBI Bank executive said the OMCs are parking extra funds into deposits, mutual funds schemes and using for loan repayments. “They are interested to improving their credit profile,” he said.
For OMCs, diesel and petrol margins have expanded 41% and 53% to Rs 1.2 per litre and Rs 2 per litre, respectively.
“Since decontrol, OMCs have been recording super-normal margins on diesel, averaging Rs 1.8 per litre. We believe margins will eventually settle at Rs 1.8 per litre based on the economics of the marginal cost of setting up a new gas station and our global case studies,” said Kotak Securities in its report on OMCs.
