Oil companies pre-tax profit seen jumping three times to Rs 1 lakh cr this fiscal: Report

Mumbai: Oil marketing companies are set to book a record pre-tax profit of at least Rs 1 lakh crore this fiscal amid higher retail prices in the domestic market and stable but considerably low crude prices overseas, a report said.

Crude price has fallen more than 30 per cent this fiscal so far from the year-ago period, yet oil companies have not reduced retail prices which have been unchanged since May 2022.

Oil marketing companies (OMCs) may see operating profit rebounding to Rs 1 lakh crore this fiscal, compared with an average of Rs 60,000 crore between fiscals 2017 and 2022, and thrice of the last fiscal's low of Rs 33,000 crore, Crisil said in a note on Tuesday.

Higher profitability will help improve the companies' credit metrics, which had weakened significantly in the past few fiscals amid muted profitability and significant capital expenditure, the report based on the three state-run oil companies.

The oil companies make money from two businesses: refining, where they earn a gross refining margin, which is the value of refined products at the refinery gate minus the cost of crude; and marketing through retail pumps, where they earn a margin on refined products.

Fiscal 2023 saw record gross refining margins averaging USD 15/barrel as global demand, particularly for diesel, was strong after alternative fuels like natural gas soared and the European Union imposed sanctions on Russian products following the invasion of Ukraine.

But soaring crude prices, which averaged USD 94/barrel for the fiscal, were not accompanied by higher retail prices, which have remained unchanged since May 2022.

As a result despite strong refining margins, marketing losses were a steep Rs 8/litre, which kept the overall profitability weak last fiscal.

Fortuitously, there was a steady fall in the crude prices since then, helping them swing from an operating loss in Q1FY23 to strong profits Q4FY23.

According to Naveen Vaidyanathan, a director at the agency, this fiscal should see a switch in the growth drivers. Marketing margins could veer to an operating profit of Rs 5-7/litre, while gross refining margins may moderate to USD 6-8/barrel as global demand-supply imbalance eases, if crude averages USD 80/barrel and no cut in retail prices.

A spike in operating profit is critical as oil companies have significantly increased their capex to Rs 3.3 lakh crore between fiscals 2017 and 2023 to expand capacity in downstream refining and petrochemicals, product pipelines and marketing infrastructure. As a result, their gross debt more than doubled from Rs 1.2 lakh crore in fiscal 2017 to Rs 2.6 lakh crore in fiscal 2023, but profitability remained subdued.

This fiscal, their capex is estimated to be Rs 54,000 crore.

According to Joanne Gonsalves, an associate director of the agency, despite continued capex, improved profitability should help shore up their standalone credit metrics from the low of last fiscal. For instance, interest coverage can improve to 7.4x from 2.4x last fiscal.

Equity rights issues by the oil companies, currently being planned for capex, will also support credit metrics.

But higher-than-expected crude prices, or any decline in retail prices without a corresponding fall in crude prices along with forex losses can alter the expectations.