Moody’s pegs OMC losses at $2.3 billion since Nov-21

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Indian Market
by 5paisa Research Team Last Updated: 2022-08-08T19:03:14+05:30

In a recent report on India’s oil marketing companies (OMCs), Moody’s Investors Services has highlighted that between IOC, BPCL and HPCL the losses are staggering. Moody’s estimates that these OMCs would have incurred losses of Rs.19,000 crore ($2.3 billion) by keeping retail prices static amid rising crude prices.

Between Nov-21 and Mar-22, the price of crude went up by more than 75%, but retail prices were held at the same level.

Normally, when the crude prices and the landed cost of oil basket goes up, then OMCs need to hike the price. There are 3 options. Firstly, the entire extra cost can be passed on to the end consumer, but that would be inflationary.

The second is for the government to absorb the loss and subside oil. That would not be possible in the current macro scenario. The last option is to put the losses in the books of OMCs, which is what has happened now.

Government has a slightly different argument on this front. It believes that when the price of crude was rising from $25/bbl to $80/bbl, most of the OMCs have made a lot of profits by way of higher selling prices and higher inventory translation gains.
 

Check - Brent Crude Crosses $87/bbl on Supply Concerns


These OMCs need to use up part of their gains made during this period to providing an offsetting relief to the consumers. Price hikes have started now, but it is still happening gradually.

Moody’s estimates that based on the current Brent crude price of $119/bbl, the OMCs would be losing around $29-$31/bbl on petrol and diesel. That alone would result in a combined loss of $80 million for the OMCs on a daily basis.

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This would continue unless the prices of petrol and diesel are hiked to reflect the actual market levels of crude. Clearly, the OMCs cannot afford to lose $2 billion each month. 

This is on top of the $2.30 billion that the oil marketing companies have already lost trying to subsidize petrol and diesel over the last 4 months. As revenues get hit, these oil marketing companies will need to borrow more in the short term debt market pushing up the yields at the short end of the yield curve.

While the OMCs have the leeway to undertake daily price hikes, a large price hike would need the approval of the government.

But it is not all that bleak for the oil marketing companies. For instance, sustained increase in crude prices will also result in inventory valuation gains for refiners, which will partially offset the impact of lower selling prices.

Moody’s is worried that a combination of higher working capital requirements and weaker earnings of OMCs could negatively impact the credit metrics of these companies, which are already under valuation stress.

For now, there are no simple answers. Retail inflation is already hovering over 6%, which is the outer tolerance limit set by the RBI. Analysts have warned that free pricing of petrol and diesel would take the rate of inflation closer to the 7.5% mark.

That would pose a regulatory challenge as then the RBI would have not choice but to hike the repo rates in the economy. For the government and the OMCs, it does look like a Catch-22 situation for now.

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