Oil Marketing Companies’ Q2 Performance: Hits And Misses  

Lower inventory gains and higher foreign exchange losses marred the September-quarter earnings of state-owned oil marketing companies, but there were silver linings.

Operating profits of Indian Oil Corporation Ltd., Bharat Petroleum Corporation Ltd., and Hindustan Petroleum Corporation Ltd. dropped by at least one-third in the quarter.

"The major reason behind the operational decline of OMCs was lower inventory gains and higher foreign exchange losses. Adjusting for these two items, the core Ebitda of all the three OMCs has not changed much," Nitin Tiwari, an oil and gas analyst at Antique Stock Broking told BloombergQuint. IOCL's core Ebidta dropped more than 20 percent, but that was largely due to the one-time employee expense, added Tiwari.

IOCL's employee cost jumped 56 percent to Rs 3,706 crore in the September quarter, due to a one-time contribution for superannuation benefits.

Inventory gains were lower as Brent crude, the Asian benchmark, averaged around $75.89 per barrel compared with $74.97 per barrel in the quarter-ended June. Foreign exchange losses were higher due to the near-6 percent depreciation of the Indian rupee against the U.S. dollar.

Refining crude oil and marketing retail fuel are the core operations of the three state-run companies. Of the three, only IOCL managed to improve its performance - that too only in the marketing segment.

December Quarter Outlook

The tide is starting to turn for the better for the oil marketing trio.

Brent crude, the Asian benchmark, has fallen as much as $10 per barrel since the start of the December quarter, on the back of rising inventories and the Trump administration's decision to let eight countries -- including India, Japan, and South Korea -- keep buying Iranian oil even after the U.S. reimposed sanctions on the OPEC producer.

The decline in crude oil prices will have a contrasting impact on the performance of the three state-owned firms. While the fall could result in some inventory losses, it could also boost the companies' ability to increase gross marketing margins earned on the sale of petrol and diesel.

The fall in international oil prices will also help offset some of the pain from the Narendra Modi government's Oct. 4 direction to oil marketing companies to cut prices of automobile fuels by Re 1 per litre.

So far in the December quarter, the gross marketing margins earned on the sale of every litre of petrol and diesel, is lower compared to the previous quarter, but the trend is improving due to the fall in crude prices.