The operating profit of the three state-run oil marketing companies (OMCs) is expected to hit ₹1-lakh crore in FY24, from the average of around ₹60,000 crore between FY17 and FY22, Crisil Ratings said on Tuesday.

The cumulative operating profit of ₹1-lakh crore this financial year by Indian Oil Corporation (IOCL), Hindustan Petroleum Corporation (HPCL) and Bharat Petroleum Corporation (BPCL) will be three times of the profit of ₹33,000 crore clocked in FY23.

The higher profitability would help improve the sector’s credit metrics, which had weakened significantly in the past few fiscals amid muted profitability and significant capital expenditure (capex), Crisil Ratings said.

An analysis of three OMCs rated by Crisil Ratings, accounting for the entire sector, indicates as much.

Two business sources

Government-owned OMCs earn from two businesses: refining, where they earn a gross refining margin which is the value of refined products at the refinery gate minus the cost of crude oil used to produce them; and marketing, where they earn a margin on petrol, diesel and other petroleum products sold mainly through retail pumps, the agency explained.

It pointed out that FY23 witnessed record gross refining margins averaging $15 per barrel. Global demand, particularly for diesel, was strong as prices of alternative fuels such as natural gas soared and the European Union imposed sanctions on Russian products.

“But soaring crude oil prices, which averaged $94 per barrel for the fiscal, were not accompanied by higher retail prices, which have remained unchanged since May 2022. What that meant was, despite strong refining margins, marketing losses were a steep ₹8 per litre, which kept the overall profitability of OMCs weak last fiscal,” it added.

Fortuitously, there was a steady fall in the price of crude oil as last fiscal progressed, which helped OMCs swing from an operating loss in the first quarter to strong profits in the fourth quarter.

“This fiscal (FY24) should see a switch in the growth drivers. Marketing margins could veer to an operating profit of ₹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 (Brent) averaging at around $80 per barrel and no cut in retail pump prices,” Crisil Ratings Director Naveen Vaidyanathan said.

The rebound in operating profit is critical for the sector that has seen a significant increase in capex, as much as, around ₹3.3-lakh crore between FY17 and FY23 to expand capacity in downstream refining and petrochemicals, product pipelines and marketing infrastructure.

Gross debt rises

“Consequently, gross debt more than doubled from ₹1.2-lakh crore in FY17 to ₹2.6-lakh crore in FY23, even as profitability remained subdued. Capex will continue to be high this fiscal and is estimated at Rs 54,000 crore,” Crisil added.

Credit profiles continue to be underpinned by implicit government support, given the strategic importance of the sector. Equity rights issues by the OMCs, currently being planned for capex, will also support credit metrics, it said.

“That said, higher-than-expected crude oil prices, or any decline in retail fuel prices without a corresponding fall in crude oil prices could alter the expectations. Moreover, volatility in crude oil prices, which can lead to inventory losses, and forex losses due to sharp rupee depreciation will bear watching,” the agency said.