Indian Oil Marketing Companies (OMCs) faced a challenging September quarter due to weak margins and inventory losses

Strong marketing margin and higher profitability, how OMC stocks look oiled up for revival in second half of FY2025 However, a recovery is anticipated in the latter half of 2024-25, driven by improving margins. Read on to know more about how range-bound oil prices and other factors could potentially drive OMCs revival in the second half of this fiscal year

Oil marketing companies (OMCs) weighed down the performance of corporate India in the September quarter. The weak performance of the refining segment, inventory losses and significant LPG under-recoveries contributed to the poor show. The three OMCs—Bharat Petroleum Corporation (BPCL), Hindustan Petroleum (HP) and Indian Oil Corporation (IOC)—reported a combined consolidated net profit of Rs.1,991.1 crore, falling by 92.8% year on year.

The impact of OMCs on India Inc.’s overall performance can be assessed by comparing the aggregate PAT growth of all companies in the BSE 500 index and the index’s aggregate PAT growth (excluding OMCs). The data from Reuters-Refinitiv for 498 companies in the BSE 500 index shows a 1.7% y-o-y decline in the aggregate consolidated net profits (not adjusted for extraordinary items). After excluding OMCs, the aggregate net profit growth improves to 5.6% y-o-y. However, after the poor September quarter, the performance is set to improve in the second half of 2024-25. Recent reports from multiple brokerage houses, such as ICICI Securities, Prabhudas Lilladher, Antique Stock Broking, Motilal Oswal, and YES Securities, have been positive on the performance of OMCs.

What led to poor show?
The refining segment was muted amid the excess supply and demand concerns (especially from China). The benchmark Singapore GRMs (gross refining margins) averaged $3.7/barrel in the September 2024 quarter, compared to $9.6/barrel in the September 2023 quarter. A fall in crude oil prices led to inventory losses. The Brent crude averaged $78.71/barrel in the second quarter of 2024-25, compared to $85.92/barrel in the corresponding period of the previous year.

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In addition, the marketing segment earnings were hit due to the decline in product cracks and LPG losses. The petrol and diesel cracks (price difference between petroleum products like diesel, gasoline and fuel oil, and the input, which is crude oil) fell significantly on both quarter-over-quarter and y-o-y basis in the September quarter. The LPG subsidy has burdened the OMCs by Rs.17,490 crore in the first half of 2024-25, which dented their profitability due to lack of government support.

What will drive revival?
The recovery in the refining segment and improvement in product cracks is expected to support performance. Singapore GRMs hit a three-month high of $6/barrel in November 2024, according to the data compiled from an ICICI Securities report. The report lists a drawdown in crude and product inventories in the US over the past several weeks, a marginal uptick in demand and refining capacity disruptions as reasons for the jump in the benchmark refining margins. The strong marketing margins will boost the profitability of OMCs in the second half of 2024-25. Steady retail prices of petrol and diesel, coupled with expectations of range-bound crude oil prices, will continue to support the marketing margins.

Weak demand and oversupply pressure

Range-bound oil prices to help
Moreover, range-bound oil prices will minimise the impact of inventory, which in turn will support the profitability of OMCs. The Brent crude price averaged $72.7/barrel in December 2024 (up to 16 December), and prices are under pressure amid concerns over lower demand (due to weak economic activity in China and increased adoption of electric vehicles) and potential oversupply, due to the likelihood of an increase in non-OPEC oil. Despite the downward pressure on the oil price, a recent JM Financial report states that OPEC+ will continue to use its pricing power to support Brent crude price around $75/barrel by further deferring the unwinding of output cuts to ensure the market remains in deficit or minimal surplus. Reuters forecasts Brent crude to average $74.53/barrel in 2025.

The capping of the downside in oil prices will not only benefit OMCs but also the upstream players—ONGC and Oil India. This is because stable oil prices will support the net realisation of the upstream companies. Net realisation is the price at which the company sells oil and gas in the open market after subtracting subsidies.

Margins to offset LPG losses
LPG burden will continue to remain significant in the second half. A YES Securities report estimates an additional burden of Rs.22,500 crore for OMCs. Nevertheless, the report is optimistic as healthy refining and marketing margins are likely to offset the impact of underrecoveries even in a worst-case scenario of zero government aid, states the report. A report from Antique Stock Broking also states that LPG burden is not a serious concern. “Our calculations indicate that another two months of marketing margin cushion can set off the LPG burden,” adds the Antique report.

Company wise assessment
ICICI Securities and Antique Stock Broking reports remain positive on all three OMCs, whereas YES Securities prefer Hindustan Petroleum and BPCL. Motilal Oswal prefers Hindustan Petroleum among the three OMCs.

Apart from margin (refining and marketing) tailwinds, analysts list ambitious expansion plans and comfortable leverage as the key strongholds of IOC, whereas the revival of the Mozambique project by the fourth quarter of 2024-25 is the key positive for BPCL. Demerger and potential listing of the lubricant business and the start of the Rajasthan refinery in early 2025-26 are the growth catalysts for Hindustan Petroleum.

This story originally appeared on: India Times - Author:Faqs of Insurances