India’s high gas retailers IOC, BPCL and HPCL have collectively misplaced round $2.25 billion (₹19,000 crore) in income between November and March by holding petrol and diesel costs unchanged regardless of a pointy rise in crude oil costs, Moody’s Traders Service mentioned on Thursday.
Petrol and diesel costs remained unchanged between November 4, 2021, and March 21 regardless of costs of crude oil (uncooked materials for producing gas) averaging round $111 per barrel within the first three weeks of March in comparison with round $82 in early November.
State-owned Indian Oil Company (IOC), Bharat Petroleum Company and Hindustan Petroleum Company (HPCL) on March 22 and 23 raised petrol and diesel costs by 80 paise per litre every however paused the rise on Thursday.
“Based mostly on present market costs, the oil advertising and marketing corporations are presently incurring a income lack of round $25 (over ₹1,900) per barrel and $24 per barrel on sale of petrol and diesel, respectively,” Moody’s mentioned in a report.
If crude oil costs proceed to common round $111 a barrel, the three rated entities – IOC, BPCL and HPCL – will incur a mixed each day lack of round $65-70 million on the sale of petrol and diesel until gas costs are elevated to cowl the rising crude oil costs, it mentioned.
“Based mostly on our estimates of common gross sales quantity between November and first three weeks of March, the state-owned refining and advertising and marketing corporations collectively have misplaced round ₹2.25 billion in income on petrol and diesel gross sales,” Moody’s mentioned.
This equates to round 20 per cent of the mixed FY2021 EBITDA for the three entities.
The ranking company estimated that IOC’s income loss to be round $1-1.1 billion whereas that of BPCL and HPCL to be about $550-650 million every over the identical interval.
“This loss in income will add to the brief time period borrowings, funded with working capital traces, of the refiners till such time that crude oil costs keep at elevated ranges.
“Over time, the businesses would possibly have the ability to make up for a few of these losses if oil costs come down,” it added.
Whereas gas costs in India are deregulated and the refiners can go on price will increase to the buyer, a steep value hike such because the one required beneath the present oil value setting might be in coordination with the federal government and will contain a discount in excise duties.
“We do anticipate that the federal government will permit the refiners to regulate costs appropriately and keep away from a scenario the place refiners proceed to make losses of this magnitude for a chronic interval,” it mentioned.
Gradual value enhance
Commenting on the 2 days of value enhance, Moody’s mentioned this underpins the expectation that the value will increase might be gradual and happen over a time period slightly than being a one-time adjustment.
“Till such time, the refining and advertising and marketing corporations can cowl the rise in feedstock prices both by a rise in promoting costs or a discount in excise duties or each, they must proceed to soak up a proportion of the elevated feedstock prices which is able to harm their profitability and enhance borrowings,” it mentioned.
Working capital must go up
A sustained enhance in crude oil costs may also end in stock valuation positive aspects for the refiners, which is able to partially mitigate the impression of decrease promoting costs.
Larger crude oil costs may also end in elevated working capital necessities, leading to incremental borrowings for the refiners.
Weaker earnings mixed with greater borrowings will weaken the credit score metrics of the downstream corporations, the ranking company mentioned.
“A pointy rise in crude oil costs, mixed with the refiners’ incapability to extend retail promoting costs of transportation fuels in India for over 4 months (between November 4, 2021, and March 21, 2022) because of not too long ago concluded elections in 5 Indian states, will harm the profitability of state-owned refining and advertising and marketing corporations IOC, BPCL and HPCL,” it mentioned.
Excessive oil costs, nevertheless, can have a blended impression on the sector.
ONGC, OIL to learn
Whereas upstream oil and fuel producers akin to ONGC and OIL will profit from greater earnings, downstream corporations like IOC, BPCL and HPCL might be negatively impacted due to greater feedstock prices and elevated working capital necessities.
Whereas most state-owned oil and fuel corporations in India are presently devising methods to handle carbon transition dangers, these are nonetheless fairly nascent.
“Most corporations would not have any agency capital allocations to transition to cleaner vitality sources and diversify away from conventional fossil fuels,” Moody’s mentioned. “Corporations akin to ONGC, OIL and IOC haven’t even introduced any tentative time frames to attain carbon neutrality.”
A sustained excessive oil value setting will incentivise customers to transition to different vitality sources. Nevertheless, given India’s excessive fossil gas dependency, development potential and important developmental wants, demand for oil and fuel is more likely to proceed rising though consumption development charges have began to sluggish.
As and when absolute demand begins to say no, India will first scale back imports earlier than reducing home manufacturing, it added.
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March 24, 2022
