Fitch Ratings on Monday said that it does not expect oil marketing companies (OMCs) to immediately cut retail prices of diesel and petrol as the focus would be on first recouping losses.
“Fitch expects crude oil prices to fall to an average of $96 per barrel in FY23 and believes that OMCs may not immediately cut fuel prices, allowing marketing margins to normalise and recoup some of the current losses,” it said in a statement.
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However, retail losses would still outweigh the strength in demand and refining margins in FY23, weakening OMCs’ credit metrics to beyond their standalone credit profiles’ (SCPs) negative triggers, it added.
The ratings agency observed that worst may be over for OMCs after a significant debt increase in Q2 FY23 on weak EBITDA from marketing losses, a depreciating rupee and high working-capital needs.
“We expect the marketing segment to turn profitable from FY24,” it noted.
Profitability under pressure
Retail losses from auto fuel prices that have been frozen for around six months amid elevated crude oil prices kept the OMCs’ profitability under pressure in Q2 FY23. This was driven by losses on diesel sales, while losses on petrol sales moderated, despite a fall in average crude oil prices to $98 a barrel in Q2 FY23 from $112 in Q1 FY23, it explained.
“We expect marketing margins and overall profitability to continue improving in FY24 as crude oil prices fall to Fitch’s assumption of $80 a barrel. This, along with lower working-capital needs and average mid-cycle refining margins, should drive an improvement in the OMCs’ credit metrics to levels closer to or better than the SCPs’ negative triggers,” Fitch said.
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However, a scenario of crude oil prices remaining high for longer than Fitch expects may lead to mounting losses and escalating debt at OMCs, pressuring their operations and SCPs. This could lead to a rethink in the government’s current approach to fuel price hikes, excise duties, and/or the need to provide relief to OMCs, notwithstanding the competing priorities between OMCs’ financial health and government’s fiscal and inflationary pressures, it added.