Sharper Cuts in Petrol, Diesel Prices Possible only if Oil Companies Forego Supernormal Profits

IANS 16 March 2020

Economy & Nation

Consumers may still get sharper cuts in retail prices of petrol and diesel if Indian oil marketing companies (OMCs) decide to reduce their margins on the sale of auto fuels that has increased substantially due to abnormally low global oil prices.

According to an ICICI Securities report, net auto fuel margin of OMCs would be super-normal at Rs5 per litre on 16 March 2020, despite OMCs absorbing Rs3 per litre excise duty hike. This would mean that state-owned companies still have room to cut petrol and diesel prices if they are willing to sacrifice supernormal profits coming from higher margins.

The government on Saturday raised excise duty on both petrol and diesel by Rs3 per litre but OMCs factored this increase in cost and still reduced retail price of the two products marginally. But as it pans out now, OMCs have a very large window to provide relief to consumers.

The brokerage report said that the hike in excise duty on auto fuels by Rs3 per litre being absorbed by OMCs has led to fall in net marketing margin to Rs0.33 litre on March 15 from Rs3.68 per litre on 13th March.

However, plunge in refinery transfer price (RTP), based on 15-day rolling average and changed fortnightly, by Rs4.4 -Rs5.5 per litre would boost net margin on 16th March to Rs5.09 per litre as reduced by the price cut, the report said.

At latest prices, the net margin of OMCs works out to Rs9.01 per litre (price cuts will bring it down over the next 15 days) suggesting net margins are likely to remain very high even in early-April 2020.

Net marketing margin is Rs2.09/litre in FY19-20 - till date and was Rs1.83/litre in FY18-19 vs Rs0.97p - Rs1.06/litre in FY14-15-FY17-18, suggesting new normal is Rs2/litre.

"The higher net margin calls for OMCs to cut petrol and diesel retail price sharply to benefit consumers and industry to lower cost and boost consumption and demand," said an oil sector analyst.

An official of OMC, however, said the pricing decisions should be taken while also considering volatility in oil markets but retail price of petrol and diesel is still following international price movements and changes going ahead would be bad.

ICICI Securities said that they have raised FY20-21E on auto fuel net marketing margin to Rs1.75/litre from Rs1.5/litre earlier. Further upside is not ruled out; upside to OMCs' FY20-21E earning per share (EPS) at a margin of Rs2.0-Rs2.5/litre would be 8%-29% with HPCL being most sensitive to margins, the report said.

Though gross refinery margins on OMCs are also expected to remain high, ICICI Securities has cut down the projection for FY20-21 as demand shock due to coronavirus pandemic remains a concern. We have, therefore, cut OMCs' FY20-21E GRM (gross revenue margin) to US$4.5 - $5.5/bbl from US$5.0 -$6.0/bbl earlier, it said.

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