Crude oil prices have fallen almost 30 percent from October highs, clocking operational gains for oil marketing companies (OMCs) but how does the rest of fiscal 2019 look like for refiners?
CNBC-TV18 spoke to MK Surana, chairman and managing director at Hindustan Petroleum Corp Ltd (HPCL) about the prospects for OMCs for the rest of the financial year. Surana also spoke about the company's gas distribution business after getting license of 12 areas.
Q: Does this mean a seminal jump in gross refinery margins (GRMs) for you all, this big fall in crude prices or is it getting translated into lower product prices as well?
A: It is definitely translating into lower product prices which you can see from October 4th onwards the petrol and diesel prices has been on the downward trend. Somewhere in October it was around $80-84 per bbl and then it fell down to $70 per bbl or something like that. Therefore, whether this immediately helps in getting the GRM up, is also a function of cracks; the cracks have been on lower side especially on gasoline that has been a very weak cracks, diesel has been good. So the GRM will be a function of both of these. The positive factor for GRM will be low fuel prices and better working capital – that will be the positive sign. Inventory loss maybe a negative sign.
Q: But you have a substantial working capital improvement, I would assume, because wholesale rates have fallen rather sharply. So can you broadly give us some guidance about GRMs in the third quarter? We are almost through with the third quarter?
A: Yes, but because we are nearing the completion, so I would not like to make any specific statement on that right now because it need to get through the board.
Q: Not even directionally?
A: I would like to hold myself on that right now.
Q: You were finishing your sentence – going by the drop in crude...
A: I was trying to say that there was a sharp fall in the crude prices but there has also been up and down in between the period. So it will be a sum total of that.
Q: I wanted your thoughts on some news reports which indicated that the government may shift part of its subsidy burden including Rs 20,000 crore on the fuel subsidy from current fiscal to the next year in order to manage fiscal deficit. Have you heard anything on that front and what would the impact be on oil marketing companies?
A: Currently the subsidy is there only on the public distribution system (PDS) kerosene and the subsidised liquefied petroleum gas (LPG) cylinders and we have been getting the reimbursement from the government on both of these accounts. So oil marketing companies does not absorb any subsidy on kerosene and LPG.
Even if that is true that rollover is only an impact of delayed reimbursement of that but it is not a loss to oil marketing companies to that effect. We are fully reimbursed on LPG.
Q: You will be reimbursed but if you are reimbursed late you have to bear the working capital cost which is why we wanted to ask you had you heard that the payments could be delayed?
A: As of today there is no specific indications on that.
Q: I wanted to ask you about demand – this is a surprising number we got that demand for fuel products in November fell by 1.7 percent. Most of the previous one, we saw them rising flatness in September but otherwise it has been rising between 4 percent and 8 percent. Is this fall disturbing, is it a trend?
A: There is also a phenomena, if you see historically, immediately after Diwali the truckers activities come down a bit and there is a fall in demand. Last year Diwali was in October and this year it was in November, so when you see month-on-month, the last November will be higher demand and this November will be lower demand. So I wouldn’t say that it is a straight indication of any fall in demand or something like that particularly when the prices are lower. So let’s see the trend further.
Q: A lot of brokerages have been a bit of concerned about the government’s decision to ask the oil marketing companies to absorb one rupee per litre on petrol and diesel and a lot of analysts believe that Q3 and Q4 onwards the impact will be felt on financials. What is your view there?
A: Fortunately the crude prices came down and the pressure on the margins have subsided substantially on that. So I think we should consider as a past history now.
Q: It is absorbed?
A: I had mentioned earlier also that it was a specific intervention from the government but the prices varied on day-to-day basis in line with international prices and when the prices are lower, the pressure on the margin reduces and our capacity to pass on the full impact to the market improves to that extent.
Q: What are your thoughts on city gas distribution (CGD) space because there have been huge investments made in this space. What do you see as a future and do you see HPCL getting into it anytime soon?
A: We are already in CGD space, we already have got the license of around 12 geographical areas and we are in this business already and this is the emerging trend as far as gas as means of transportation fuel and that is a growing business as well. This is a cleaner medium for transportation, good for environment and even economy wise also it’s comfortable for the consumers and that the same time it replace part of the demand for crude and liquid fuels. So CGD will be gaining more momentum, recently also there was ninth round of CGD, there is a tenth round which will be coming. It has covered lot many areas. The infrastructure is getting developed as far as the pipeline connectivity is concerned, more and more fuel stations will have CNG facilities available and pipe gas at home is available. So I think it is a good space and HPCL is in it and HPCL will be in it.
Q: Oil marketing companies have been asked to waive off the deposit for gas cylinders in rural areas. Will this chip off something from your margins?
A: Waiving of the deposit does not in any way takes away any part of the margins, so there is no correlation to that.
Q: Working capital, you will have to borrow it, right?
A: Not exactly because the deposit anyway is a part of capital formation because cylinders are capitalized.
Q: So there isn’t any material difference to your profit and loss (P&L) because of this measure?
A: Not to that effect and even in the overall basket of working capital which we have, the LPG cylinder will not be a substantial part of it, so that is not the main thing but there is a push from the government on this and two-three days back you would have heard that earlier the scheme of this was only for certain categories and now it is made for universal access for all poor categories.