State-owned oil marketing companies (OMCs) are on a high as timely subsidy payments by the government and reduction in diesel under-recovery over last few months have helped them reduce dependence on lenders.
The increase in cash flows has led to huge drop in borrowing and interest costs of the three fuel retailers -- Indian Oil Corp, Hindustan Petroleum Corp and Bharat Petroleum Corp.
However, competition from private players like Reliance Industries and Essar Oil, following imminent diesel deregulation, may keep them on their toes. In the last two years, delay in cash subsidy payments by the government had forced OMCs to increase their short-term borrowings to meet working capital requirement, impacting their profitability.
Cash compensation from the government has started coming every 2.5-3 months now in comparison with six months earlier, helping fuel marketers to save up on interest costs. IOC's borrowings have sharply fallen to Rs 61,900 crore from Rs 86,263 crore in March, chief financial officer P K Goyal had said during the company's annual general meeting last month.
Goyal said fall in under-recoveries and regular subsidy payments by the government's since the beginning of this fiscal has helped the company to bring down borrowings, which would help the company's profitability in current fiscal.
Diesel under-recovery in the last fortnight fell to 8 paise, indicating that the government may soon make announcement of complete deregulation of diesel. OMCs are expecting further reduction in borrowings on complete deregulation and subsidy payment by government.
Brokerage Motilal Oswal Securities sees 50% reduction in gross under recoveries to Rs 75,000 crore by fiscal 2016 if the government announces complete deregulation of diesel next month. A realistic kerosene/LPG hike could cut under-recovery by 70%, it said.
"We estimate OMCs' debt to reduce by 15-25% in the next one year, leading to 8-16% earnings per share benefit, with HPCL at 16%, followed by BPCL at 9% and IOCL at 8%," it said. Interest costs of OMCs could come down by as much as Rs 2,000 crore in current and next fiscals, which would improve IOC's profitability by Rs 700 crore, HPCL by Rs 300 crore, and BPCL by Rs 300 crores, Gagan Dixit, an analyst with Quant Capital, said.
Complete diesel deregulation will not only help OMCs to reduce interest burden but also improve their marketing margins, which was fixed by the government in 2006. Despite cost increases of 8-10%, OMCs got only around 4% of annual escalation. Post deregulation, OMCs are expected to charge higher marketing margins. Post petrol deregulation, OMCs had seen rise in marketing margin from Rs 0.7/litre in fiscal 2011 to Rs 1.3/litre in fiscal 2015. Also, the current marketing margin in diesel in India at Rs 1.4/litre, which is way below the global averages, indicating further room for improvement.
"Likely higher marketing margins on auto fuels (Rs 0.5/litre higher diesel marketing margin will increase OMCs' profit before tax by Rs 4,000 crore," Motilal Oswal said. Brokerages believe that gain in marketing margins will also help OMCs to negate any fall in market share of diesel which may happen due to private players come back in diesel retail post deregulation. Currently, PSU OMCs together have about 42,000 retail outlets. Non-PSU players, including RIL, Essar Oil and Shell, have about 3,000 retail outlets, of which a very few are currently operational.
"Private players can capture around 10% market share over next two years, which could impact OMCs profitability very marginally," Dixit said. In the previous period of brief deregulation (FY04-07), private players' market share had reached 5% in gasoline and 10% in diesel. However, this time around, the journey may not be as smooth for private players, given that over the last decade OMCs have doubled retail outlets, modernised outlets to ensure purity and improved customer engagement, and have brought automation through real-time tracking and better inventory management, Motilal Oswal report said.
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