Fuel price freeze to hit profitability of oil companies: Fitch report

The freeze on petrol, diesel and LPG price revision despite rising costs will hit the profitability of state-owned Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL) this fiscal, Fitch Ratings said on Wednesday. The three state-owned fuel retailers haven't changed auto fuel prices for over four months now to help the government contain runaway inflation.

"Marketing losses on account of price-freezes for gasoline (petrol), gas oil (diesel) and Liquefied 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)," Fitch said in a note.

The rating agency expected 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," it said. Fuel sales in India rose to pre-COVID-19 levels during the April-June quarter of the current fiscal year.

The three firms reported record-high GRMs, benefitting from all-time-high product spreads amid tight demand-supply industry conditions. "However, overall profitability was weighed down by marketing losses," it said.

HPCL reported the highest EBITDA — a key measure of a company's profitability — loss of Rs 11,900 crore in the first quarter (FY22: Rs 9,700 crore profit), given its higher share of marketing earnings. BPCL also reported an EBITDA loss of Rs 4,900 crore (FY22: Rs 19,200 crore profit), despite a better balance of marketing and refining volume. IOC's positive EBITDA of Rs 5,800 crore (FY22: Rs 47,100 crore) was supported by its larger refining operation, including a standalone refinery subsidiary, and 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," Fitch said. It expected near-term prices to continue to reflect the government's efforts to balance the country's fiscal needs, inflationary pressure on 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," it added. The ratings of the three firms are driven by their strong linkages with the government.

"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," the rating agency said.