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Fuel price hikes resurrect strong marketing margin for OMCs

Fuel price hikes resurrect strong marketing margin for OMCs

Fuel price hikes resurrect strong marketing margin for OMCs
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By Ankit Gohel  Jun 17, 2020 5:25:36 PM IST (Published)

OMCs’ net margin being Rs 2.5-3 per liter in FY21E now appears possible given the price hikes, the visible resolve to keep margins high, the recent decline and near-term headwinds to oil prices, ICICI Securities said in a report.

The recent rise in petrol and diesel prices has resulted in a better auto fuel marketing margin for oil marketing companies (OMC). The marketing margins which were at minus Rs 1.28 per liter during June 1-6, have surged to Rs 3.1 per liter on June 15 due to retail price hike of Rs 5.0 - 5.23  per liter (7-8 percent) since June 6, a report said.

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OMCs’ net margin being Rs 2.5-3 per liter in FY21E now appears possible given the price hikes, the visible resolve to keep margins high, the recent decline and near-term headwinds to oil prices, ICICI Securities said in a report.
“The recent correction in oil prices and any further correction at a time when domestic retail prices are being hiked augurs well for marketing margin outlook,” the report added.
The fuel prices were hiked by the oil marketing companies for the eleventh day in a row on Wednesday. The petrol and diesel prices were increased by 55 and 60 paise per litre respectively in the national capital, compared with the previous day's rates, according to data from Indian Oil Corporation. In eleven hikes, petrol price has gone up by Rs 6.02 per litre and diesel by Rs 6.40 a litre.
The report states the need to further increase retail fuel price by Rs 2.4 per liter to boost net margin to Rs 1.91 per liter during June 16-30 and Rs 2.11 per liter on July 1.
The brokerage has raised FY21E EPS, target prices and upgraded Hindustan Petroleum Corporation (HPCL) and Bharat Petroleum Corporation Ltd (BPCL) to Buy and India Oil Corporation (IOC) to Add from Hold.
However, the brokerage noted that the gross refining margin (GRM) weakness remains a concern while large inventory gains appear imminent.
Further, ICICI Securities has also raised FY21E net marketing margin estimate to Rs 2.5 per liter from Rs 2 per liter, which has led to upgrade in FY21E EPS of OMCs by 17-18 percent and in target price by 17-28 percent.
It believes that rise in net margins to Rs 2 per liter since Q1CY19 was mainly due to BPCL privatisation, which the government wanted to do and was approved by the Cabinet Committee on Economic Affairs (CCEA) in November 2019.
“Net marketing margins remaining at a reasonable level of Rs 2 per liter is crucial for BPCL’s proposed privatization to go through. Given the weakness in GRM and likely throughput and sales volume fall due to lockdown, net marketing margins would need to be Rs 2.5-3.0 per liter for BPCL to report strong earnings and GoI to realize the good price for BPCL’s privatization,” the report said.
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