The freezing of petrol, diesel and LPG price revision despite rising costs will affect the profitability of state-owned companies Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) this fiscal year, Fitch Ratings said on Wednesday. .
The three state-owned fuel retailers have not changed car fuel prices for more than four months now to help the government contain runaway inflation.
“Marketing losses due to price freezes for gasoline (gasoline), gas oil (diesel) and liquefied petroleum gas (LPG) during recent periods of high crude oil prices may put pressure on profitability and, therefore, Indian Petroleum Marketing Company Credit Measures (WTO),” Fitch said in a note.
The rating agency expected OMC credit metrics to weaken beyond the negative triggers in their Autonomous Credit Profiles (SCPs) in the fiscal year ending March 2023 (FY23), retail losses outweighing strong gross refining margins (GRMs).
“However, metrics are expected to improve to levels adequate for SCPs beginning in FY24, based on our assumptions of lower crude oil prices and a resulting decline in refinery gate prices. This should allow marketing margins to improve and may provide opportunities to recoup some current year losses,” it said.
Fuel sales in India reached pre-Covid-19 levels in the April-June quarter of the current fiscal year.
All three companies posted record GRMs, benefiting from unprecedented product gaps amid tighter supply and demand in the industry.
“However, overall profitability was weighed down by marketing losses,” he said.
HPCL recorded the highest EBITDA loss of Rs 11,900 crore in the first quarter (FY22: Rs 9,700 crore profit), given its higher share of marketing revenue.
BPCL also reported an EBITDA loss of Rs 4,900 crore (FY22: Rs 19,200 crore profit), despite a better balance between marketing and refining volume.
IOC’s positive EBITDA of Rs 5,800 crore (FY22: Rs 47,100 crore) was supported by its larger refining operation, including a stand-alone refining subsidiary, and a more diversified revenue stream.
“OMCs bore the largest share of the burden of soaring crude oil prices in 2022, despite government tax cuts, with only limited price increases being passed on to end consumers,” Fitch said.
He expected near-term prices to continue to reflect the government’s efforts to balance the country’s fiscal needs, inflationary pressures in the economy and the financial health of the WTO.
“However, OMC marketing margins are expected to remain in line with long-term crude oil price movements. In the past, the government has allowed OMC to recoup losses resulting from the temporary suspension of daily price reviews during subsequent periods,” he added.
The ratings of the three companies are driven by their close ties to the government.
“A scenario of prolonged state interference in retail automotive fuel prices and losses at CMOs would be negative for their SCPs. This could lead to a rethinking of the government’s approach to fuel prices.
“We believe the freedom for CMOs to control retail fuel prices would support the government’s attempts to reinvigorate the divestment of BPCL, should it choose to do so,” the rating agency said.
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