The profit margins of oil marketing companies (OMCs), which have been in the red due to a freeze on retail prices of petrol and diesel, are expected to inch towards the green line during FY24, particularly in the April-September period.
ICICI Securities in a recent report noted that product spreads for gasoline and diesel have softened, and while this has reduced gross refinery margins (GRMs), the net impact on OMCs is positive, since marketing margins have expanded far more than the GRM decline.
“We see the trend remaining in favour of marketing margins over H1 FY24E, with relatively softer demand trends and strong inventory builds keeping crude and product prices in check,” the brokerage added.
It pointed out that Brent crude prices had remained flattish over the past few months, with limited traction seen in demand in the near term. There has been no material disruption in Russian crude shipments despite the price cap by the EU coming into force effective February 5, 2023.
“FY24E prospects for OMCs are set to be stronger, helped by still healthy GRMs at $10-11 per barrel and prospects for improving Chinese and Indian demand by H2 FY24E, overall softer crude and product prices offering stronger marketing margins over H1 FY24E,” it added.
Margins in positive territory
ICICI Securities pointed out that the past eight weeks witnessed stronger macros for OMCs, with the combination of double-digit GRMs (albeit at lower levels vs Q2-Q3 FY23 highs) and marketing margins getting into positive territory in a meaningful way.
Recent weeks have been a welcome reversal in trends on the marketing front, with a relatively flattish trend in crude prices (at $85 per barrel levels) and more importantly, softer product prices helping boost retail fuel margins for petrol and diesel materially over Q4 FY23 (till February 24, 2023), it said.
The calculated GRMs for OMCs (excluding any inventory impact/ windfall tax) have remained strong at $11-13 per barrel for Q4 (till February 24, 2023), down $1-2 Q-o-Q due to softer diesel and ATF spreads.
However, due to the $14.4-a-barrel decline in applicable diesel prices and $5.6-per-barrel increase in petrol prices, marketing margins for petrol have moderated Q-o-Q to Rs 6.8 per litre (average for Q4 till February 24), while diesel losses have narrowed to Rs 1.2 for Q4-TD, it added.
“Blended retail margins of Rs 1.2 per litre for Q4-TD are way above the Rs 3 net loss estimated for Q3, and if we see February third week averages, retail margins have jumped Rs 3.4 a litre. This is significant for the earnings prospects of OMCs over FY24E,” the brokerage said.