Despite rising raw material costs, petrol and diesel prices are unlikely to increase due to upcoming general elections in India next year, according to Moody’s Investors Service. State-owned fuel retailers like Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL), and Hindustan Petroleum Corporation Ltd (HPCL) have maintained petrol and diesel prices at a standstill for a record 18 months, despite the surge in crude oil prices last year. International oil prices have increased since August, impacting the profitability of these state-owned oil marketing companies. However, they have limited flexibility to pass on higher raw material costs by increasing retail prices because of the upcoming elections.
Moody’s noted that while high oil prices may weaken the profitability of these companies, they are unlikely to be sustained for long due to global economic weaknesses. The decline in marketing margins for these oil companies has been offset to some extent by improved gross refining margins (GRMs). Moody’s expects GRMs and international transportation fuel prices to moderate in the coming quarters. While a smaller gap between international and domestic prices will reduce marketing losses for the oil marketing companies, overall profitability is expected to remain weak as retail prices are likely to remain unchanged.
Despite the weakening operating performance, the three oil marketing companies are expected to report strong earnings for fiscal year 2024, with IOCL and BPCL better positioned to withstand further increases in crude oil prices compared to HPCL. Moody’s noted that strong earnings in the first quarter of fiscal year 2024 and lower crude oil prices compared to the previous fiscal year have reduced the companies’ working capital requirements and allowed them to reduce borrowings. The Indian government’s capital support for the oil marketing sector will also boost cash flows for these companies and partially cover their capital spending needs.
In conclusion, despite the challenges posed by rising oil prices, the oil marketing companies are expected to maintain their financial stability through fiscal year 2024, with the impact on retail prices likely to be limited due to the upcoming elections.
