The gross refining margins for downstream oil marketing companies are expected to be positive and set for a “multi-year bullish trend” due to steady demand growth and higher investment in secondary processing by the refiners, ICICI Securities said in a report on Friday. The assessment comes amidst renewed concerns about marketing margins in these companies for retail sale of auto fuels, following a recent spike in global crude oil prices and uncertainty caused by the Israel-Hamas conflict.
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“Within refining product-wise demand, strength is observed in both transportation fuels (gasoline/diesel/ATF) as well as petrochemical/industrial inputs (naphtha/LPG),” noted the analysts. To meet the increasing demand, large scale secondary processing capacity will also be required in global refining portfolio.
However, even with the expected increase in refining margins, the retail pricing of petrol and diesel will play a crucial role in determining the bottom lines of the OMCs in the current quarter. “We remain cautious on OMCs in the near term, but a normalization of retail prices can significantly boost earnings,” the report said.
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Petrol and diesel prices are to be revised daily based on the 15-day rolling average, as per the pricing methodology followed by the OMCs. However, prices have not been revised since April last year, following the surge in global crude prices due to Russia’s invasion of Ukraine.
Over the past two quarters, OMCs have been posting profits until late September when crude prices reached their highest level at $97 a barrel since November 2022, causing OMCs to face under-recoveries of Rs 7/litre on the sale of petrol and diesel.
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The global operating rates of downstream companies, as anticipated by analysts at ICICI Securities, are expected to steadily improve to more than 83%, up from the current range below 80%.
Earlier, Moody’s had stated in its report that it expects the operating performance of OMCs to weaken over the next few quarters if crude prices remain elevated. However, it also mentioned that the companies’ earnings for FY24 are still likely to be strong, thanks to a strong first quarter due to favorable refining margins.
The report reiterates that realizations of upstream companies are expected to remain strong, and both Oil and Natural Gas Corporation Limited and Oil India Limited are likely to see realisations well above the last 8-year averages in FY24-25E, even as windfall taxes remain. “With the recent lag in the imposition of taxes and the gross level of crude prices, net realization may have an upside risk vs. our base case assumption of $75.7/bbl for ONGC and $78.0/bbl for Oil India, for FY24E.”
Further, the report has highlighted that stronger demand for Liquified Petroleum Gas combined with normalisation of petrol and diesel retail prices ahead of the election may prove to be material positives for the gas companies.
Furthermore, the report highlights that stronger demand for Liquified Petroleum Gas (LPG), combined with the normalisation of petrol and diesel retail prices ahead of the election, may prove to be material positives for gas companies. Domestic consumption of LPG rose by almost 4% month-on-month to 25.51 lakh metric tonnes in September, according to data from the Petroleum Planning and Analysis Cell.
Last month, the government also approved the expansion of the Pradhan Mantri Ujjwala Yojana (PMUY) to add 75 lakh poor households to the scheme’s beneficiary base over three years at an estimated cost of Rs 1,650 crore.
A strong demand for LPG has a positive impact on GAIL and city gas distribution companies. “Every $50/t increase in LPG price increases GAIL EBITDA by Rs 4.1 billion or ~4%, while the rise in propane prices (a derivative of LPG) creates better competitiveness for the industrial segment for all CGDs (Gujarat Gas at Morbi would be the biggest beneficiary),” according to the report.
Over the next 12 months, ICICI Securities has maintained its positive ratings on GAIL, Indraprastha Gas Ltd, and Mahanagar Gas Ltd and in the upstream space, OIL India and ONGC will register positive margins, it says.
