OMCs under pressure: Rising under-recoveries, thinner spreads to shave operating profit margins by 1.7% this fiscal

Mumbai: Thinner spreads and rising under-recoveries are expected to shave the operating profit margins of oil marketing companies (OMCs) by 1.5-1.7 percent this fiscal, even as crude prices remain elevated and volatile, a report said. According to the rating agency Crisil, operating margins had declined 1.6 percent in fiscal 2019. “We also foresee net profit margins coming under pressure because of higher interest costs. OMCs have had to contract 22 percent more short-term debt last fiscal because of inadequate payments from the government, and also to service under-recoveries of the recent past,” Crisil Research Senior Director Prasad Koparkar said. In fiscal 2019, the profitability of OMCs was hit as their average gross refining margin (GRM) declined by a third to $5.3 per barrel from $7.9 in fiscal 2017-18. This fiscal, GRMs are foreseen even lower at $4-5 per barrel, without considering inventory losses/gains, mainly due to spreads, which have been under pressure since the third quarter of last fiscal, are expected to contract afresh this fiscal, especially for motor spirit (petrol) and naphtha, because of oversupply in Asia following commissioning of new supplies. [caption id=“attachment_5500971” align=“alignleft” width=“380”]  Representational image. Reuters[/caption] Additionally, the US sanctions on Iran and Venezuela, and production cuts by the Organisation of Petroleum Exporting Countries (OPEC) are expected to keep crude oil prices firm at USD 70 per barrel and cause high volatility, Crisil said. Higher crude oil prices would, in turn, increase under-recovery on account of liquid petroleum gas and superior kerosene oil to Rs 37,000-39,000 crore this fiscal, the agency said. Last fiscal, under-recovery had surged 55 percent on-year to Rs 43,760 crore against Rs 24,830 crore budgeted by the government. The difference of Rs 18,900 crore was rolled over to this fiscal. “For the current fiscal, the government has budgeted Rs 37,500 crore towards subsidy for under-recovery. Add the rolled over under-recovery of last fiscal, and the total burden on the government is Rs 56,400 crore,” Koparkar added. Crisil’s Director Rahul Prithiani noted that to be sure, the government can increase subsidy allocation in the Union Budget for this fiscal likely in July. “But given financial constraints, it is unlikely to foot the whole bill. In such a scenario, the likely way out would be asking downstream public sector oil producers and OMCs to bear a part of the under-recovery,” he added. Overall debt of OMCs surged 39 percent to Rs 145,700 crore last fiscal, which cranked up their debt-to-Ebidta ratio to 2.5 times from 1.7 times in FY2018.