State-run oil marketing companies (OMCs) reported lacklustre results in the second quarter of 2024-25 primarily on account of weak refining margins and lower product cracks.
A product crack is the difference between the prices of one barrel of crude oil and one barrel of a specified product. A lower crack implies that refineries are making less money processing crude oil to produce refined products.
The combined net profit of the three OMCs including Indian Oil Corporation Limited (IOCL), Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL) was significantly lower in Q2FY25 from last year in the same period. On a standalone basis, their combined net profit was 88 percent lower at Rs 3,208 crore in the quarter ended September 30 from last year, compared with Rs 26,586 crore in the same period last year.
“HPCL/BPCL/IOCL reported 22%/28%/58% miss in Q2FY25 EBITDA (earnings before interest, taxes, depreciation and amortisation) due to weaker-than-expected margins. IOCL after a robust FY24 has seen weak core GRMs at ~USD3/bbl in H1FY25 faring the worst among the lot, while BPCL after a good Q1 saw its GRMs also drop,” analysts at Emkay Global said in a note.
The gross refining margins (GRMs) of the companies declined amid lower product cracks. IOCL’s average GRM for April-September 2024 was $4.08 per barrel, a steep decline from $13.12 per barrel last year. BPCL’s average GRM for the half year ended September 30 was $6.12 per barrel, compared to $15.42 a barrel last year, while HPCL’s GRM fell to $4.03 per barrel from $10.49 per barrel a year earlier.
The India’s largest refiner IOCL reported a consolidated net loss of Rs 449 crore in Q2, compared to a profit of Rs 13,713 crore in the same period last year. BPCL reported a 72 percent year-on-year drop in consolidated profit while HPCL saw a decline of 97.5 percent from last year.
However, the oil retailers made handsome marketing margins as crude oil prices were trading below $80 per barrel in the quarter, even nosediving to $69 a barrel on September 10.
“Meanwhile, OMCs continue to generate strong marketing margins on MS/HSD (motor spirit or petrol/ high speed diesel) currently, and as such, despite a dismal 2QFY25 earnings performance, we believe 3QFY25 profitability could improve further on a sequential basis,” brokerage said Motilal Oswal in a note.
LPG under-recovery
The three companies also booked huge under-recovery on the sale of liquefied petroleum gas (LPG) cylinders in the quarter. IOCL on October 28 said the company has booked under-recovery of Rs 8,870.11 crore for the first six months of FY25 on sale of cooking gas cylinders as “the retail selling price was less than MDP (market-determined price)”.
BPCL and HPCL also reported under-recovery on LPG cylinders in the quarter. The companies have booked under-recovery on LPG amid high global prices of the commodity as the country is dependent on LPG imports for the much of domestic consumption.
OMCs have not been able to pass on high global LPG prices to consumers and in turn booked under-recovery in the first six months of the year. To be sure, OMCs also provide subsidised LPG cylinders under the Ujjwala scheme.
“HPCL took a hit of INR20.6b due to LPG under-recoveries in 2QFY25. However, LPG being a controlled product, HPCL remains hopeful of financial support from the government. Owing to weak refining performance, we cut our FY25 EBITDA/PAT estimates by 27%/49%; we also reduce our FY25/FY26 GRM estimate to USD4.6/6.1 per bbl (vs. previous est. of USD6.6/8.1 per bbl,” said Motiwal Oswal.
