OMC Q2 Review: Oil marketing companies (OMCs), including Indian Oil Corp Ltd (IOCL), Bharat Petroleum Corporation Limited (BPCL), and Hindustan Petroleum Corporation Ltd (HPCL), reported a double-digit decline (between 70-99 per cent) in their respective net profit during the July-September quarter for fiscal 2024-25 (Q2FY25).
Along with weaker refinery margins, OMCs also reported inventory and LPG (liquified petroleum loss) in the quarter under review, which contributed to the fall in operating profits. India's largest OMC, IOC, booked under-recoveries on selling domestic cooking gas LPG at a government-controlled cost, which was lower than the cost. IOC controls half of the fuel market in India.
IOC reported a massive 98.6 per cent drop in net profit in the September quarter, as refinery margins fell and marketing margins shrunk. The OMC posted a standalone net profit of ₹180.01 crore in the September quarter, compared with a profit of ₹12,967.32 crore a year ago.
For the six months ended September 30, IOC had an under-recovery on LPG of ₹8,870.11 crore. IOC earned $4.08 on turning crude oil into fuels like petrol and diesel, compared to a gross refining margin of $13.12 per barrel last year.
Pre-tax earnings from downstream fuel retailing businesses slumped to just ₹10.03 crore from ₹17,7555.95 crore in July-September 2023. Revenue from operations dropped to ₹1.95 lakh crore in the September quarter from ₹2.02 lakh crore a year back as international oil prices softened.
BPCL reported a 72 per cent drop in its standalone net profit to ₹2,397 crore in the September quarter as refinery margins fell and marketing margins shrunk, compared to ₹8,501 crore in the corresponding period last year. The OMC's revenue from operations in the second quarter of the current fiscal rose by one per cent to ₹1.17 lakh crore, compared to ₹1.16 lakh crore in the year-ago period.
On the operating front, BPCL's earnings before interest, taxes, depreciation, and amortization (EBITDA) during the September quarter were ₹4,547 crore, and the margin came in at 4.4 per cent. The country's third-largest oil refiner by capacity said the average gross refining margin (GRM) for April-September fell to $6.12 per barrel from $15.42 per barrel a year earlier.
HPCL reported a massive 97.8 per cent plunge in net profit over weaker refining margins and a decline in international rates led to inventory losses. The consolidated net profit of ₹142.67 crore in July-September -- the second quarter of the current 2024-25 fiscal year -- compared to a profit of ₹5,826.96 crore a year ago, according to a stock exchange filing and company statement.
The net profit also declined compared to ₹633.94 crore in April-June. HPCL, which controls roughly a quarter of the Indian fuel market, earned $3.12 on turning every barrel of crude oil into fuel in the second quarter, compared to a GRM of $13.33 a barrel a year ago. Besides the lower refining margin, the OMC recorded ₹2,057 crore of under-recovery on selling domestic cooking gas LPG at government-controlled rates lower than cost.
"Based on past earnings calls of HPCL, we expect that by end-CY24E, the effective capacity for HPCL’s Chharra LNG terminal (5mn tonne capacity) would come online," said D-Street analysts after HPCL Q2 results. Domestic brokerage Elara Securities reiterated its ‘buy’ rating on BPCL but reduced its target price on the OMC stock over the disappointing performance in the quarter.
“We reiterate BUY as we expect BPCL with other OMCs to be allowed to earn above-historical integrated margin at <$80/bbl crude oil to finance their massive investment plan of ~ ₹6 trillion in the next five years (primarily on energy transition capex comprises ~30 per cent). However, we reduced our TP to ₹386 (from ₹408) due to lower FY25E/26E EPS, given inventory losses and lower LPG earnings,” said Elara Securities.
The three OMCs made extraordinary gains last year by holding petrol and diesel prices despite a drop in cost. The price freeze was justified to recover losses HPCL and the other two retailers had suffered in the previous year when they did not raise retail prices despite a surge in cost.
The gains arising from the price freeze were eroded, with petrol and diesel prices being cut by ₹2 per litre each just before the 2024 general elections. This and a drop in product cracks or margins on relatively stable crude oil prices led to a profit fall. Cracks—the difference between the price of crude oil used as a raw material and the price of the final product—have shrunk from their highs of FY23.
HPCL stock has shed almost 12 per cent in the last one month, yet it has rallied 140 per cent in the last one year, providing multi-bagger returns to investors. On Tuesday, shares of HPCL settled 1.36 per cent higher at ₹388.50 apiece on the BSE. BPCL has rallied nearly 86 per cent in the last one year, while IOC has shed 20 per cent from its stock in the last month.
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