Fuel Price Cut: OMCs Face Rs 3,500 Cr Hit In Q3 Operating Profits

Fuel Price Cut

Oil marketing companies (OMC) may be looking at a Rs 3,500 crore blow to their operating profits this quarter following the finance ministry’s Fuel Price Cut announcement – the reduction in petrol and diesel prices by Rs 2.50 per litre.

As per the announcement, central excise duty on the two fuels has been slashed by Rs 1.50 per litre, while Re 1 per litre would have to be absorbed by the OMCs in their marketing margins The Centre has also appealed to states to reduce the value-added tax (VAT) levied by them by a further Rs 2.50 per litre. Gujarat and Maharashtra have obliged almost immediately, translating into a total reduction of Rs 5 per litre for end-consumers in these two states.

The move is aimed at providing some respite to end users as petrol and diesel prices have skyrocketed over the past couple of months as crude oil prices breached the $85 per barrel mark. Only, it is unlikely to have a significant positive impact on demand as prices will still remain high compared with last year.

The hit of Re 1 per litre required to be absorbed by OMCs, though, will impact their profitability.

Says Prasad Koparkar, Senior Director, CRISIL Research, “As things stand, average gross marketing margins of the OMCs on diesel and petrol have come off from ~Rs 3 per litre in the closing quarter of fiscal 2018 to ~Rs 2.60 per litre in the second quarter this fiscal due to the uptrend in crude prices. Given this, our calculations indicate that the Re 1 per litre blow will shave 100-130 basis points off the OMCs’ operating margins and a Rs 3,000-3,500 crore decline in operating profits this quarter.”

To be sure, the operating profits of OMCs had increased significantly in the first quarter this fiscal and are estimated to have increased in the second quarter as well, driven by higher marketing margins and pass-through of higher crude oil prices.

However, with marketing margins already on a decline, the companies could be looking at a 15% dent in operating profits this quarter and a further 18% drop in the next quarter as well, assuming the government decides to extend the marketing margin hit.

And this might just be the beginning of their tale of woes considering the ballooning crude oil prices are estimated to push up the under-recovery burden on LPG and Kerosene by Rs 20,000-22,000 crore on-year to Rs 42,000 – 47,000 crore.

Says Rahul Prithiani, Director, CRISIL Research, “That threatens to upset the fiscal math as the government had budgeted Rs 24,900 crore for under-recoveries this fiscal. The remaining burden might thus have to be borne by upstream companies ONGC and Oil India, considering the OMCs are already taking a blow to their marketing margins in this round. And should the OMCs be also asked to share the under-recovery burden, it would impact their overall margins further.”

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