Gains from the marketing segment helped state-run oil marketing companies (OMCs) including Bharat Petroleum Corp. Ltd, Hindustan Petroleum Corp. Ltd and Indian Oil Corp. Ltd make up for the muted performance of the refining segment in the March quarter.
Marketing margins of OMCs for the March quarter were higher than expected, as these companies had not passed on the drop in product prices to customers, pointed out analysts from Nomura Financial Advisory and Securities (India) Pvt. Ltd.
But the good news could well end there on the marketing segment, especially since oil prices have now risen. “As OMCs have not taken the required price increases with increased oil/product prices, marketing margins seem to have declined in 1QFY20F,” wrote Nomura analysts in a report on 21 May.
In the near term, the focus will be on how OMCs change petrol/diesel prices post-elections, added the brokerage firm.
Coming back to the March quarter results, gross refining margin (GRM), a key measure of profitability for refining firms, was rather muted after adjusting for inventory gains. The chart alongside has the details. In this backdrop, it was helpful that the marketing segment performed better.
But the worry is that the general refining environment may remain muted going ahead. For one, demand is not expected to be robust. Secondly, global refining capacity is expected to be higher. Both these factors are expected to keep refining margins in check.
It goes without saying that investors are likely to welcome any surprise improvement in refining margins.
The implementation of the International Maritime Organization’s (IMO’s) new regulations from 2020 is expected to give a boost to margins.
Sure, OMC stocks have recovered from the lows seen in early October when the government had asked the companies to sacrifice a portion of their marketing margins. But, these shares have underperformed in the past one year vis-à-vis the Nifty 100 index, as earnings predictability has taken a knock.
According to ICICI Securities Ltd, the outlook for FY20 would depend on two factors. One, the strength of the new government, which would determine the outlook for auto fuel marketing margins. Two, “Whether IMO-mandated cut in sulphur content in marine fuel from Jan ’20 significantly boosts GRM,” analysts from the brokerage firm wrote in a recent note.
Some analysts also worry about high debt levels at OMCs. In short, various uncertainties could well mean investors will look for refined gains elsewhere.