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The weak March quarter performance of the public sector oil marketing companies (OMCs) — IndianOil, BPCL and HPCL — was brushed aside by the market.
BPCL and HPCL shot up more than 9 per cent, while IndianOil gained 3 per cent in Friday’s trade. This was despite a fall in the March quarter profit — 11 per cent year-on-year for BPCL, 28 per cent for HPCL and as much as 80 per cent for IndianOil.
Despite nil subsidy burden and sales volumes growth, the profits of the OMCs were impacted by muted gross refining margin (GRM) — the difference between the price of the companies’ product slate and their crude oil cost. From $7.85 a barrel in the March 2015 quarter, BPCL’s GRM fell to $6.3 a barrel in the recent period while Indian Oil’s GRM fell from $8.77 a barrel to $3 a barrel.
Beyond quarter The market though seems to have looked beyond a quarter, which for the OMCs, can be quite volatile. The whole year 2015-16, a better indicator of the changing fortunes for the sector, has been very good for all the three companies. The profits of BPCL and HPCL have grown more than 40 per cent year-on-year, while that of IndianOil has nearly doubled.
Two key factors helped. One, despite the rout of crude oil, refining margins were quite healthy overall. BPCL’s GRM rose from $3.62 a barrel in 2014-15 to $6.59 a barrel in 2015-16; HPCL saw the number more than double from $2.84 to $6.68 a barrel while IndianOil’s GRM increased manifold from $0.27 to $5.06 a barrel.
Next, the pricing reforms undertaken by the Centre — diesel price decontrol and direct benefit transfer of LPG subsidy — have slashed the under-recovery burden of the OMCs over the past two years. This has reduced their working capital borrowings and cut interest costs.
Refining is a cyclical business and margins go through peaks and troughs. That said, an enabling pricing environment and significant expansion plans should mean healthy prospects for the OMCs over the long term.
In the case of BPCL, the announcement of a 1:1 bonus issue also substantially buoyed sentiment for the stock.
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