India’s state-owned oil retailers have not increased prices of auto fuels for nearly a month despite a rise in crude, putting pressure on their margins.
Prices, linked to a basket of international rates, were last changed on Dec. 7 when petrol and diesel became costlier by 30 and 26 paise a litre, respectively. In Delhi, the respective price is Rs 83.71 and Rs 73.87 a litre since then.
Crude, however, continued to rise. The Brent is up 6.3% and the Indian basket of crude oil rose 5.1% between Dec. 7 and Jan. 1. While the primary reason for high retail prices in India are central and state levies that contribute more than half of the price at the pump, inability of oil marketers crimps their margins.
According to a report by ICICI Securities, the net marketing margins are likely to slip below Re 1 a litre in January. The retail price needs to be increased by Rs 2 a litre to keep the margins above Rs 2 a litre in January, it said.
Risks to fuel retailers could arise if the crude crosses $55-60 a barrel as it may become difficult for the companies to pass it on to consumers, according a report by Nirmal Bang. That’s because high excise duty, along with rising prices, would make fuel even more costlier for consumers.
Kotak Securities, however, said higher gross refining margins due rising crude prices could help offset some of the impact on marketing margins.
“We are positive on OMCs as valuations are attractive and earnings growth potential is high,” Rusmik Oza, executive vice president, head of fundamental research at Kotak Securities, said in an emailed response to BloombergQuint.
Inventory gains on crude bought at lower prices could also help cushion fuel retailers.
Refinery utilisation levels have surged even as demand for fuels remains lower than a year earlier. According to a report by Emkay, Indian Oil Corp.’s utilisation was more than 100%, while it stood at 126% and 99% for the Mumbai plants of Bharat Petroleum Corp. and Hindustan Petroleum Corp. in November.
Increased surplus and weak consumption could lead to an increase in inventory levels, said ICICI Securities.
