How Elections Hurt Oil Marketing Companies
OMCs marketing margins drop as much as 40 percent in month of May
India’s state-run oil retailers have not increased prices for 11 straight days as consumers feel the pinch of costlier petrol and diesel. And that’s led to a sudden drop in gross marketing margin they earn on every litre of auto fuels.
The price freeze comes ahead of the elections in Karnataka, and has hurt the companies like in the run-up to Gujarat polls late last year.
Diesel prices are at their highest and petrol is retailing at a four-year high. Indian Oil Corporation Ltd., Bharat Petroleum Corporation Ltd. and Hindustan Petroleum Corporation Ltd. usually revise prices daily in the metros in line with global trend.
The oil marketers’ mark-ups started declining in April after rising for the first three months of 2018, according to the data compiled by BloombergQuint. The margin on sale of every litre of petrol and diesel declined 12 percent and 14 percent, respectively, compared with March. So far in May, it has plunged 40 percent over the previous month.
The government had asked the retailers to absorb up to Re 1 on every litre of petrol and diesel to cushion consumers from rising crude prices, Bloomberg reported in April. The managements of IOCL and HPCL, speaking to BloombergQuint, denied of any such communication from the government.
Yet, retail fuel prices have not kept pace with the rise in oil since April 1. Brent Crude, the Asian benchmark, rose more than 4 percent during the period while petrol and diesel prices increased by 1-2 percent.
The lower gross marketing margins are expected to impact HPCL the most as they contribute the most to its overall operating income, according to data compiled by BloombergQuint.
The mark-up in May is at least Re 1 a litre lower than in April. According to Kotak Securities, Rs 0.5 a litre drop impacts oil marketers’ earnings per share by 12 to 21 percent.
Multiple brokerages have cited concerns over sustainability of marketing margins in the next 12-15 months when states like Mizoram, Rajasthan, Chhattisgarh, Madhya Pradesh go to polls ahead of the next general election in May 2019.