Rising crude in poll time to further erode PE of OMCs
Higher oil prices are not only pinching the average Indian. Investors in motor-fuel retailers aren’t happy either, and should brace for more pain as the Street believes politics could overshadow the cold logic of economy in the run-up to state and national polls. Oil marketing companies (OMC) such as Indian Oil (IOC), Hindustan Petroleum Corp. (HPCL), or Bharat Petroleum Corp. (BPCL) could face marketing margin compression as the political calendar over the next six-nine months gets poll heavy. These stocks have shed 22-41 per cent since the beginning of the year, while the benchmark index Nifty rose 4 per cent in the same period. Marketing margin is the money earned from the retailing of motor fuels, and it contributed nearly 40-60 per cent of the total operating profit of OMCs. Stocks have largely been victims of derating as earnings contribution of the marketing operations has remained hitherto unhurt, with OMCs passing on higher crude prices to consumers. In the run-up to polls, the Street believes, state-run OMCs may not have the luxury to pass the increase in input prices on to retail consumers. HPCL, BPCL and IOCL are trading at 6.03, 7.5, and 7.3 times, respectively, based on their 12-month projected earnings, 19-34 per cent lower than their 10-year average PE. Firming crude oil prices could further depress marketing margin, and several factors indicate that global oil prices are likely to remain elevated in the medium term. The Indian crude basket rose 29.6 per cent to $80.74 so far in 2018, according to Petroleum Planning and Analysis Cell (PPAC). Indian crude basket comprises of sour-grade Oman and Dubai sweetgrade Brent processed in Indian refineries in the ratio of 75:25. Rising crude in poll time to further erode PE of OMCs Historically, OMCs have not been able to pass on higher crude oil prices to consumers ahead of state elections. For instance, in the past four big state elections of Bihar (November 2015), UP (April 2017), Gujarat (December 2017) and Karnataka (May 2018), OMCs kept their prices frozen for about a couple of weeks, and this depressed their marketing margins. Due to the price freeze before the Karnataka election, OMC lost nearly Rs 400 crore of revenues, and marketing margins reduced from an estimated Rs 3.4 per litre to Rs 0.6 per litre for petrol and from Rs 3.8 per litre to Rs 0.8 per litre for diesel. With five critical state elections in the next two months and impending general elections next year, higher crude prices could impact the OMCs’ ability to maintain their normative marketing margins. OMC are currently making a marketing margin of Rs 1.63 and Rs 2.68 per litre on petrol and diesel, respectively. The Street is currently pricing in blended marketing margin of Rs 1.6-1.8 on auto fuel for the current fiscal year.
Will lose Rs 2,200 crore a year if fuel prices cut by Rs 1/litre: Maharashtra govt
On a day when diesel prices crossed the Rs 80-mark in Nanded, the BJP-led state government said the state would lose revenue of Rs 2,200 crore per year if it slashes the petrol and diesel prices by Re 1 per litre. Will lose Rs 2,200 crore a year if fuel prices cut by Rs 1/litre: Maharashtra govt Finance minister Sudhir Mungantiwar said the government had already slashed taxes on petrol and diesel to check the surging prices at the state level. He said the government was in the favour of bringing petrol and diesel under the ambit of the GST, “but the Congress-led governments were against such move”. The next meeting of the GST council meeting is scheduled on Friday. If the fuel prices is brought under GST, the rates could fall drastically. “Maharashtra brought down taxes on petrol by Rs 2 per litre and on diesel by Re 1 in October last year, whereas states like Rajasthan, Karnataka and AP have cut their taxes recently,” said Mungantiwar, while speaking to reporters on the sidelines of a BJP meeting on Wednesday. He blamed the “global forces” for unabated surge in fuel price in India. Petrol price has already crossed the Rs 90-mark in more than 30 cities/towns in Maharashtra, while diesel is also at an all-time high at many places. In Mumbai, petrol price remained unchanged on Wednesday at Rs 90.22 per litre, the same as on Tuesday, while diesel price was Rs 78.69. In the state, diesel rate was highest in Nanded at Rs 80.13 per litre. Nationally, the other city that had crossed the Rs 80-mark a few days back was Hyderabad; it was priced at Rs 80.62 per litre on Wednesday. Sources said if diesel price shoots over Rs 80 in Mumbai, tourist bus operators and transporters are likely to protest. Tourist bus operators are unable to hike their rates due to a cap by the government. “We want the state to intervene and reduce VAT, taxes on diesel or bring it under GST,” said a transporter.
India looking for investors to back strategic oil reserves: executive
India will start international road shows next month seeking potential investors for the second phase of its strategic oil reserves estimated to cost nearly $2 billion, the head of the operator of country’s reserves said on Wednesday. India Strategic Petroleum Reserves Ltd (ISPRL) will hold the road shows in the last week of October in Singapore, London and New Delhi, Chief Executive H.P.S. Ahuja said on the sidelines of the Tank Storage Asia Conference. India’s government approved the two strategic petroleum reserve (SPR) sites with a total capacity of 6.5 million tons in June. One site will be located in Chandikhol in the eastern state of Odisha with a capacity of 4 million tons at an estimated cost of about $941 million, Ahuja said. The second site will expand an existing SPR at Padur in the southwestern state of Karnataka by adding 2.5 million tons of storage at a cost about $662 million with construction and filling planned through a public-private partnership model, Ahuja said. The existing Phase 1 of the Padur storage site, with a capacity of 2.5 million tons was commissioned last week, he said. “During the Phase 2 constructions, we also plan to take up the filling of Padur Phase 1. So any player who is interested should submit their interests during the road shows,” said Ahuja. The two sites will add to India’s other two SPR sites at Vishakhapatnam and Mangalore, which hold a combined 2.8 million tons. ISPRL, a wholly-owned subsidiary of India’s Oil Industry Development Board, in an agreement with Abu Dhabi National Oil Company (ADNOC) received its first consignment of 2 million barrels of oil in May to fill one of the compartments at Mangalore. The current capacity of India’s SPR can meet about ten days of the country’s requirements and together with the two additional reserves, which will be finished in another six to seven years, would be able to meet about 22 days of the country’s needs, Ahuja said. The country currently imports 82 percent of its crude requirements, he added. India’s stockpiling of crude should not be affected by the loss of Iranian oil imports because of sanctions by the United States. “We’re not dependent on state oil companies to get the reserves. It’s the government of India, who decides when to fill it up. It’s a call by the government and can be done from anywhere in the world,” Ahuja said.