crude oil drips from a worker’s hand as he operates a rig at an oil field (Photographer: Taylor Weidman/Bloomberg)

Oil Retailers Tumble As Brokerages See Margin Pressure Ahead

Shares of the oil marketing companies were the worst performers on India’s benchmark indices for a second straight day as some brokerages raised concerns on whether they will be able to sustain margins in an election-heavy year.

Brent crude has surged nearly 65 percent from its 12-month low, and may climb further on factors including geopolitical tension in the Middle East and Saudi Arabia’s goal of $80 per barrel.

The margins of the state-run oil retailers --- Indian Oil Corporation Ltd., Bharat Petroleum Corporation Ltd. and Hindustan Petroleum Corporation Ltd. -- could be at a risk if the government doesn't allow them to raise retail fuel prices and asks them to absorb a part of losses, CLSA Analyst Vikash Kumar Jain wrote in a note.

Some media reports had suggested the government has asked the state-run oil marketers to absorb up to Re 1 on every litre of petrol and diesel to cushion consumers from rising crude prices. However, the management of IOCL and BPCL denied receiving such communication from the government in interviews to BloombergQuint.

The markup that oil marketers earn on the sale of every litre of petrol and diesel declined in the three months ended December as price hikes slowed down ahead of the Gujarat state elections. Now with crude prices near $74 per barrel and key states as well as national elections scheduled in next 12 months, investors ‘continue to doubt the sustainability of any strength in marketing margins,’ CLSA said.

The three OMCs are expected to report strong set of numbers in the quarter gone by on the back of flattish gross refining margins, limited inventory gains and strong marketing margins.

Singapore GRM – the Asian benchmark averaged around $7 per barrel in Q4 as compared to $7.2 per barrel in Q3, while the marketing margins earned on the sale of every litre of petrol and diesel were on an average 40 percent higher. The companies are also expected to report inventory gains because of higher crude prices in Q4.

However, CLSA said concerns on margins ahead of key state elections and corporate action like ONGC selling stake in IOCL and BPCL and IOCL acquiring GAIL (India) Ltd., may "limit buying interest".

The international brokerage house reduced the target price on all the three OMCs by at least 17 percent. This follows a similar price target cut by Kotak Securities. Besides the concern on margins, the homegrown brokerage had also cited the expected increase in the working capital requirement on the proposed consolidation of oil PSUs and investments in refining as concerns.