While the government's moves to reduce the fuel prices come as a breather for the common man, oil marketing companies (OMCs) are in for more pain. The double whammy of a falling rupee and rising oil prices had already left them bleeding, and after the Centre yesterday asked the three state-run players to absorb a cut of Re 1 per litre of petrol and diesel (retail rates), OMC stocks plummeted.
Worse, the collective net profit of the oil PSUs - Hindustan Petroleum (HPCL), Bharat Petroleum (BPCL) and Indian Oil (IOC) - is reportedly likely to take a massive hit in the remaining part of this fiscal.
"This is a step back in the price deregulation process. The government would have definitely talked to the OMCs on the decision. Our assessment shows Rs 4,500 crore combined impact on net profit of the three OMCs in the current financial year," a senior official at one of the OMCs told ETEnergyworld. These three OMCs had collectively recorded a net profit of Rs 38,775 crore in the previous financial year ended March 2018.
ICRA foresees a bigger hit. "The price cut is credit negative for the PSU OMCs as this would impact their net marketing margins severely. At an industry level, this would lead to loss of margins of Rs 70-72 billion [Rs 7,200 crore] on auto fuel sales [in the next six months]," K. Ravichandran, Senior Vice-President at ICRA, told the portal.
The share prices of the state-owned OMCs, which had tanked 10.5-12.23% yesterday following the announcement, are yet to recover. BPCL (down 22.55%) and HPCL (down 21.35%) were reportedly among the top losers in opening trade this morning. IOC, too, is down nearly 13%. In fact, all the components of the BSE Oil & Gas index are in the red currently.
A broader question is what this latest development means for petroleum product pricing reforms in India, eight-odd years in the making. The government had de-regulated the prices of petrol and diesel in 2010 and again in 2014, in a bid to stimulate private investment in the fuel retail sector and make the pricing of both fuels more transparent.
On paper, this means that the OMCs are free to fix prices based on the average of the trailing 15 days of benchmark Arab-Gulf fuel prices, which move in tandem with global crude oil prices. But despite the Modi government's claims of not meddling in the pricing of the transportation fuels, an analysis of the historical fuel price data put out by IOC reveals a pattern of pre-poll hiatuses in price hikes.
Most recently, the OMCs had initiated a 19-day price freeze on petrol and diesel ahead of the Karnataka polls in May, despite international fuel prices going up by nearly $5 a barrel in the interim period. But the accumulated cost was soon passed on to customers through daily price hikes after the hiatus ended.
Similarly, ahead of the Gujarat polls in December, retail prices of petrol were virtually held static for almost 14 days. Five states including Punjab, Goa, Uttarakhand, Uttar Pradesh and Manipur had elections during the January-April 2017 period. And IOC had imposed a freeze on petrol and diesel prices between January 16, 2017, and April 1, 2017, the portal reported, back when the company followed fortnightly revision of fuel prices. The buzz is that private oil companies like Reliance Industries and Shell could also cut prices in the days ahead. So the total loss for the oil sector may end up a lot fatter.