India Ratings and Research (Ind-Ra) expects continued subdued crack spreads in both gasoil and gasoline will impact the overall gross refining margins (GRMs) of Indian oil marketing companies (OMCs), though they have healthy complexity and low operating costs per barrel. Gasoil and gasoline are the two key products of Indian refiners, accounting for around 65% of their product slate. While OMCs have been consistently increasing their pipeline capacity to reduce transportation costs and venturing into new business segments such as petrochemical and city gas distribution to diversify its revenue streams, Ind-Ra believes that the refining and marketing segment would continue to dominate the overall profitability in the near term. With expectations of subdued recovery in GRMs and continuance of healthy marketing margins, Ind-Ra believes that marketing segment would be the principal contributor to OMCs’ profitability in FY22.
The weak crack spreads would continue to be driven by the global destruction of transportation fuel demand, led by various travel restrictions imposed due to the COVID-19 pandemic. Though there has been an improvement in crude prices, the crack spreads have not improved and the capacity utilisation of refineries remain lower than pre-COVID levels (North America refineries capacity utilisation; March 2021: 77.6%, March 2020: 85.6%). In a weak demand environment, a fresh capacity addition of 3mbpd of refining capacity (largely concentrated in Asia and middle-east region) is also likely to come onstream in the next two years, leading to continued pressure on GRMs. Refiners, to mitigate the impact of lower crack spreads on gasoil and gasoline, have resorted to investments in downstream capacity and refinery bottom of the barrel upgradation through large refinery capital expenditures. However, continued low GRMs would have a significant financial impact on the less complex refineries who might be forced to shut down if capital and operating structures do not justify viable operations.
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 Note: Indian Oil Corporation Ltd (IOCL, IND AAA/Stable), Hindustan Petroleum Corporation Limited (HPCL, IND AAA/Stable) and Bharat Petroleum Corporation Limited (BPCL)
   Marketing Margins - Strong Pillar of
OMCs’ Credit: The marketing segment behaves like a
toll road and ensures stable cash flows to OMCs as profitability is linked to
volume throughput and the per unit margin. Given the volume hit in the
marketing segment owing to the travel restrictions anticipated at the beginning
of FY21, OMCs kept a higher marketing margin leading to healthy absolute
profitability. Despite a 15% yoy decline in marketing volumes to 109 mmt during
9MFY21, growth in OMCs’ marketing EBITDA was led by around 70% yoy increase in
net marketing margins to INR3.8 per litre and higher inventory gains (9MFY21:
INR60.8 billion, 9MFY20: INR8.4 billion). Ind-Ra expects that marketing margin
to remain healthy in the range of INR2-3/litre during FY22. This would ensure
i) sufficient cash flow from operations with OMCs to meet high capex
requirements, ii) cash available to support dividend and buybacks and iii)
strong valuation to the disinvestment programme of one of the large OMCs.     |
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