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Marketing Losses Pressure Near-Term Profitability at Indian Downstream Firms

Marketing losses on account of price-freezes for gasoline, gasoil and liquified petroleum gas (LPG) during recent periods of elevated crude-oil prices may pressure the profitability and, consequently, the credit metrics of Indian oil marketing companies (OMCs), says Fitch Ratings.

We expect OMCs’ credit metrics to weaken beyond the negative triggers of their Standalone Credit Profiles (SCP) in the financial year ending March 2023 (FY23) as retail losses outweigh strong gross refining margins (GRMs). However, metrics should improve to levels adequate for the SCPs from FY24, based on our lower crude oil price assumptions and a resultant dip in refinery gate prices. This should allow marketing margins to improve and may present opportunities to recoup some current-year losses.

Petroleum product sales in India rose to pre-Covid-19 pandemic levels during 1QFY23. Indian Oil Corporation Ltd (IOC, BBB-/Stable), Bharat Petroleum Corporation Limited (BPCL, BBB-/Stable) and Hindustan Petroleum Corporation Limited (HPCL, BBB-/Stable) reported record-high GRMs of USD31.8/barrel (bbl), USD27.5/bbl and USD16.7/bbl, respectively, benefitting from all-time-high product spreads amid tight demand-supply industry conditions.

However, overall profitability was weighed down by marketing losses, with HPCL reporting the highest EBITDA loss of INR119 billion (FY22: INR97 billion profit), given its higher share of marketing earnings. BPCL also reported an EBITDA loss of INR49 billion (FY22: INR192 billion profit), despite a better balance of marketing and refining volume. IOC’s positive EBITDA of INR58 billion (FY22: INR471 billion) was supported by its larger refining operation, including a standalone refinery subsidiary, and a more diversified earnings stream.

The OMCs have borne the largest share of the burden of surging crude oil prices in 2022, despite government tax cuts, with only limited price rises being passed on to end consumers. We expect near-term prices to continue to reflect the government’s efforts to balance the country’s fiscal needs, inflationary pressure in the economy and the OMCs’ financial health. However, OMCs’ marketing margins should remain aligned with crude oil price movements over the long term. The government has in the past allowed OMCs to recoup losses from the temporary suspension of daily price resets in subsequent periods.

The Issuer Default Ratings of IOC, BPCL and HPCL are driven by their strong direct and indirect linkages with the state of India (BBB-/Stable) and high likelihood of support. The OMCs’ FY24 credit metrics may come under pressure if crude oil prices remain above our base-case assumption of USD85/bbl in 2023 and if the OMCs continue to bear this financial burden.

A scenario of prolonged state interference in auto-fuel retail prices and losses at the OMCs would be negative for their SCPs. This may lead to a rethink of the government’s approach to fuel prices. We believe freedom for OMCs to control retail fuel prices would support government attempts to re-initiate the divestment of BPCL, should it choose to do so.
Source: Fitch Ratings

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