Rising under-recoveries to shave operating profit margins of OMCs: Report

In fiscal 2019, profitability of OMCs was hit as their average gross refining margin (GRM) declined by a third to $5.3 per barrel from $7.9 in fiscal 2017-18.

This fiscal, GRMs are foreseen even lower at 4-5 per barrel, without considering inventory losses/gains, mainly due to spreads, which have been under pressure since the third quarter of last fiscal, are expected to contract afresh this fiscal, especially for motor spirit (petrol) and naphtha, because of oversupply in Asia following commissioning of new supplies.

Additionally, the US sanctions on Iran and Venezuela, and production cuts by the Organisation of Petroleum Exporting Countries (OPEC) are expected to keep crude oil prices firm at $70 per barrel and cause high volatility, Crisil said.

Higher crude oil prices would, in turn, increase under-recovery on account of liquid petroleum gas and superior kerosene oil to Rs 37,000-39,000 crore this fiscal, the agency said.

Last fiscal, under-recovery had surged 55 per cent on-year to Rs 43,760 crore against Rs 24,830 crore budgeted by the government. The difference of Rs 18,900 crore was rolled over to this fiscal.

"For the current fiscal, the government has budgeted Rs 37,500 crore towards subsidy for under-recovery. Add the rolled over under-recovery of last fiscal, and the total burden on the government is Rs 56,400 crore," Koparkar added.

Crisil's Director Rahul Prithiani noted that to be sure, the government can increase subsidy allocation in the Union Budget for this fiscal likely in July.

"But given financial constraints, it is unlikely to foot the whole bill. In such a scenario, the likely way out would be asking downstream public sector oil producers and OMCs to bear a part of the under-recovery," he added.

Overall debt of OMCs surged 39 per cent to Rs 145,700 crore last fiscal, which cranked up their debt-to-Ebidta ratio to 2.5 times from 1.7 times in FY2018.