Stock Fundamentals

State-run oil companies take a knock

Anand Kalyanaraman | Updated on November 17, 2019 Published on November 17, 2019

The major drag on the performance was the steep fall in their gross refining margins

Weak refining margins, subdued volumes and inventory losses took a toll on the performance of the three public sector oil marketing companies (OMCs) — Indian Oil, BPCL and HPCL — in the recent September 2019 quarter.

Indian Oil’s consolidated profit in the quarter fell nearly 86 per cent y-o-y to ₹468 crore, while that of HPCL fell about 22 per cent y-o-y to ₹762 crore. BPCL did better than its peers with about a 3 per cent rise in profit to ₹1,503 crore, but this too was nothing to write home about. But for a tax-reversal of about ₹580 crore, BPCL’s bottom-line, too, would have shrunk.

The major drag on the companies’ performance was a sharp fall in their gross refining margin (GRM) — the difference between the price of their product slate and the cost of crude oil.

Indian Oil’s reported GRM in the September 2019 quarter fell the most to $1.3 a barrel from $6.8 in the year-ago period.

BPCL’s reported GRM fell to $3.4 a barrel from $5.6, and that of HPCL fell to $2.8 a barrel from $4.8 in the year-ago period.

 

 

Many a trouble

While inventory losses due to dip in fuel prices aggravated the impact on reported GRMs, especially for Indian Oil, the core GRMs, too, were weak during the quarter, except for BPCL which saw some rise.

Weak domestic economic conditions and resultant subdued volumes, especially the contraction in diesel sales, adversely impacted the financial performance and margins of the OMCs. Also, a planned shutdown at HPCL to upgrade to BS-VI fuels did not help.

Indian Oil’s sales revenue fell about 16 per cent y-o-y in the September 2019 quarter, while that of HPCL and BPCL fell 10-11 per cent y-o-y.

Marketing margins for the three companies improved in the quarter compared with the year-ago period, but this could not make up for the other challenges.

Interestingly, all the three companies have chosen, for now, to continue with the earlier tax regime. They have not shifted to the recently announced lower corporate tax rate regime that would have entailed giving up some tax incentives, including lapse of the accumulated MAT (Minimum Alternate Tax) credit.

The weakness in gross refining margin in the September 2019 quarter is a continuation of what was seen in the June 2019 quarter. So, for the six months from April to September 2019, Indian Oil’s GRM crashed to $2.96 a barrel from $8.45 in the year-ago period. BPCL’s GRM for the six months ended September 2019 more than halved to $3.10 a barrel from $6.52 in the year-ago period, and HPCL’s GRM, too, fell sharply to $1.87 from $5.93.

The environment in the refining market remains weak and so does the demand conditions, given the growth challenges in the economy. This could reflect in the financial performance of the OMCs in the coming quarters, too.

On the positive side, the International Maritime Organization’s regulations that mandate cleaner fuels for ships come into effect in January 2020. This should translate into an increase in demand for the higher-grade products of the OMCs and support their GRMs.

The weak financial performance of the OMCs has also reflected in their stock performance. Since early June, the Indian Oil and HPCL stocks have fallen about 22 per cent and 11 per cent, respectively.

The BPCL stock was also on the back foot until a couple of months ago when news about the impending stake sale by the Centre in the company saw the stock taking off; it is now up about 20 per cent since early June.

Published on November 17, 2019
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