OMCs Undecided Whether They’ll Take A Hit On Margins, Says HPCL

A worker pushes a tricycle loaded with Hindustan Petroleum Corp. liquefied petroleum gas (LPG) cylinders. (Photographer: Dhiraj Singh/Bloomberg)

Written by
Revati Krishna
Written by

Revati Krishna

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Oil marketing companies will wait and watch international crude prices before deciding on whether they will take a hit on margins after the government cut excise duty on petrol and diesel earlier this week, said MK Surana, chairman of Hindustan Petroleum Co. Ltd.

"We have to see how the product prices move in international market and what are the effective rates of taxation at that point of time and what were the crude and product prices," Surana told BloombergQuint in an interaction. "Depending on that we have to take decisions on prices," he added.

Surana said that OMCs already operate on "wafer-thin margins" as they deal with products with "reasonable sensitivities" around pricing. Right now, fuel prices are revised daily relative to the international oil prices.

It will be “hypothetical and presumptive to speculate” what needs to be done right now, said Surana.

The government, earlier this week, reduced the excise duty on petrol and diesel attempting to ease the prices which had touched a three-year high in June. Surana said any decision on prices should beneifit both the company and the customers.

Ultimately it should be a reasonable balance between the consumers' interest and the commercial health of the organisation.

MK Surana, Chairman and MD, HPCL

Surana also said that here has been no decision yet on Oil and Natural Gas Corporation Ltd. buying the government's stake in Hindustan Petroleum Corporation Ltd. using current market pricing.

Watch the full interview here.

Here are the edited excerpts of the interview:

Government has cut excise duty, their reports that state government might also consider lowering VAT. What will be HPCL's stand on this? Will HPCL bear any brunt of rising crude prices?

At present, the central government has cut the excise duty onpetrol and diesel by Rs 2 which will have an impact of around Rs 2.50 on petrol and Rs2.25-2.30 on diesel. Yesterday, Honorable ministers also requested the stategovernments to consider slashing off the value added tax because the VAT is also quite highin most states. If that request is considered, there may be somesoftening in prices.

As far as oil marketing companies are concerned, they operate on wafer-thin margins. So, we did not have much leeway. As we go forward, we have to see how the product prices move in international market and what are the effective rates of taxation at that point of time and what were the crude and product prices. Depending on that we have to take decisions on prices.

Ultimately, it should be a reasonable balance between the consumers' interest and commercial health of the organisation.

Assuming prices go up, will the OMCs then cut their margins?

Right now, we decide prices based on internationalprices on a day-to-day basis. It is basically 15-days rolling prices on a daily basis. The actions required will depend on the pricesprevailing at that point of time. It will be a little hypothetical andpresumptive to speculate what needs to be done at that point of time.

It's not like we lower or increase the margin depending on our own wish because we operate in a space which deals with the products with reasonable sensitivities. Therefore, OMCs operate on a very thin margin. So, we need to see what possibilities are there from time to time, and based on that, we need to take decisions. Normally we have got little leeway on that.

ONGC will be acquiring the government's stake in HPCL at prevailing market price? Will current market price be the right value for this acquisition?

I do not think that a decision has been taken that Oil and Natural Gas Company will be acquiring Hindustan Petroleum Corporation Ltd. at the prevailing market price. Government has appointed advisers who are working on the valuation of the company. Market pricing is one of the methodologies to price a company but it not the only one. Once the valuation is done, the buyer and seller have to decide the price at which they wish to strike the deal. I do not think that there is any decision right now like that which suggests that the deal has to happen at market price.

Also Read: ONGC Set To Complete HPCL Stake Acquisition By End Of This Year

ONGC CMD did say that the acquisition will happen at prevailing market price.

He did say that and that is the buyer's view but there hasto be the seller's view also on that. Ultimately, it has to be decided between theboth of them.

It is not a question of me agreeing or not agreeing. It has to be decided between the buyer and the seller. As HPCL, we are neither the buyer nor the seller, but there are certain guidelines that are defined in the Securities and Exchange Board of India Takeover Act or majority transfer share code or few provisions in the Companies Act, and HPCL will be guided by that.

Post acquisition, there will be an integration between MRPL and HPCL. What would be more apt – acquisition or a merger? How will that benefit HPCL?

Actually, it makes sense. There is reasonable logic for MRPLto be under HPCL's fold because it gives a synergy. They are a standalone refiningcompany and we have a marketing setup. We sell more than what we produce.

The proposal is yet to be taken to both the boards, whether it will be a merger or an acquisition. Acquisition has to be there and the merger will follow if we think that it is the right way to do it. But yes, that may be one of the options. Either acquisition or merger, MRPL being with HPCL is good for HPCL as well as for MRPL.

The first quarter was pulled down due to inventory losses. How has the second quarter fared? Can we expect inventory gains this quarter?

The second quarter just got over 2-3 days back and the numbers will be worked out. In Q1, there were reasonable inventory losses. We do not expect substantial inventory losses in Q2 as compared to Q1 but the numbers are being worked out, and I expect Q2 to be better than Q1 but not sure to what extent.

What are the sustainable gross refining margins going forward?

I think the $6 will be a sustainable refining margin if crude and product prices sustain and there are no inventory losses.

What kind of petrol and diesel volume growth are you expecting for FY18?

If you see last month's data, September was quite robust, and if you see the first half of the current fiscal, petrol has grown 7 to 8 percent and diesel around 3 to 4 percent but in September it was a double-digit growth for both diesel and petrol. Going forward for the full year, growth rate in petrol should be above eight percent and diesel should be around 4 to 5 percent. LPG will be double digit and aviation turbine fuel will definitely be double digit.

How do you see the movement in crude oil prices? Are the current levels good for the company?

if you see, for last few days, crude has been hovering in a range between $55 and $60 levels. $60 is a strong resistance point and $55 does find a support base. Going forward, crude prices will be around the sub-60 range. Of course, in recent times it peaked above 59 but it came down. Going forward it should be slightly softer. I think it will be between $55 and $60.