Commodities News

Fuel price cuts may be moderate, impact on OMC margins minimal

Earlier, a business magazine reported that fuel prices, which are deregulated, may be cut in the range of Rs 4-6 per litre, and a proposal under consideration involves government and OMCs to bear equal burden of it.

Shares of the three state-owned oil marketing companies fell by up to 4% on Friday following reports of a likely cut in the retail prices of petrol and diesel ahead of the general elections scheduled next year. However, analysts believe that any price cut won’t be sharp enough to seriously impact the profitability of these firms, whose earnings have been robust in the last two quarters.

“Currently, the diesel and petrol gross marketing margins of OMCs are high at Rs 6 and Rs 11 per litre respectively, much higher than the normative level of Rs 3 and Rs 4 per litre each, hence a Rs4-6 per litre cut at retail level would essentially bring their margins closer to normative levels, without hitting their profitability as such,” said Madhavi Arora, Lead Economist at Emkay Global.

Earlier, a business magazine reported that fuel prices, which are deregulated, may be cut in the range of Rs 4-6 per litre, and a proposal under consideration involves government and OMCs to bear equal burden of it.

Assuming the price cut in the mentioned range, the marketing margins of the OMCs will be Rs 2.6 per litre for diesel and Rs 5 per litre for petrol, calculations done by Emkay Global shows. The normalized gross marketing margins for both auto fuels are Rs 3 per litre. This will likely reduce the petrol price by 6.2% and that of diesel by 4.4%.

“While the government revenue receipts have been robust this fiscal owing to healthy tax buoyancy and higher dividends, the weak disivestment proceeds and some likely slippage in revenue expenditure do not really give the government the space to absorb much additional burden of fuel excise cuts in 4QFY24,” Arora said. “Thus, any likely fuel excise cut will be contained under Rs4-6 per litre.”

However, if the cuts are in the range of Rs 8-10 per litre, it might affect the margins of OMCs.

“If it does happen (cuts of Rs10/ltr), this would eat away even the normative margins of OMCs, unless burden-shared by the government,” said Arora. “We note each Rs1 per litre excise cut currently costs the exchequer Rs 155-160 billion on an annualized basis.”

Moreover, the move can come against the government’s targeted agenda if crude prices start rising again. Analysts see crude prices to remain ‘hard’ in 2024 which could again put pressure on marketing margins of OMCs.

“Crude prices are expected to remain hard in the new year, on the back of the pursuit of producers to make gains supported by unrest and supply constraints,” said Deepak Mahurkar, Leader Oil & Gas at PwC India.

“Even if such chaotic events (sudden geopolitical tensions) fail to emerge over the next 12 months, volatility will remain high as most energy markets have not yet been able to adapt to previous swings in supply and demand fundamentals to find a new normal,” Dan Klein, Head of Energy Pathways, S&P Global Commodity Insights had said.

In the first two quarters of the financial year, OMCs have been able to make healthy profits compared to the first half of the last fiscal primarily on the back of improved marketing margins.

The government has kept the prices of autofuels unchanged since April 2022. Presently, there is a 20.6% excise duty on petrol and a 17.6% excise on diesel.

At around 9:20 a.m. on Friday, shares of HPCL were down over 4.6%, that of BPCL declined by over 3% and IOCL’s share fell over 3%.

Source:financialexpress.com

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