Refinery margins, inventory gains to offset losses on petrol, diesel for State-owned fuel retailers IOC, BPCL and HPCL: Fitch

State-owned fuel retailers IOC, BPCL and HPCL may suffer marketing losses in January-March 2022 quarter for holding petrol and diesel prices despite a rise in cost but robust core refining margins and windfall inventory gains should mitigate the potential losses in near term, Fitch Ratings said Tuesday.

The three fuel retailers kept petrol and diesel prices unchanged for a record 137-days between November 2021 and March 2022 despite a nearly USD 27 per barrel rise in crude oil prices. The three companies raised the rates by Rs 10 per litre over 16 days beginning March 22 before again hitting a pause button.

"Gasoline (petrol) and gasoil (diesel) retail prices in India, and consequently the marketing margins of the oil-marketing companies (OMCs), should remain aligned with the movement in crude oil prices over the long term, notwithstanding sporadic periods of constant retail prices amidst heightened volatility in oil prices," Fitch said in a note.

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The correlation of retail fuel prices with the 15-day rolling average of crude oil prices (reference prices) has remained high at 93 per cent since the onset of the COVID-19 pandemic in January 2020.

The correlation excludes the impact on retail prices from changes in excise duties, and includes periods when the OMCs did not pass through the movement in oil prices immediately to consumers, it said.

"The OMCs benefitted from strong marketing margins during times of low oil prices (March-June 2020), and endured margin pressure during high oil prices (November 2021-March 2022) as they tried to keep fuel prices affordable," it said.

However, November 2021-March 2022 was the longest retail price freeze despite the reference crude oil prices increasing by nearly USD 27 per barrel (or Rs 13 per litre) during the period.

This "may lead to marketing losses for the OMCs in the fourth quarter of the financial year ending March 2022," it said adding that retail fuel prices have subsequently been raised by only around Rs 10, implying that further price hikes may be required for marketing margins to reach pre-November levels, and early FY23 marketing margins may also be under pressure.

"We believe that robust core refining margins and windfall inventory gains should mitigate potential marketing losses in the near term, and the OMCs may see opportunities to recoup some of the losses in periods of falling oil prices, if and when that happens," it said.

Fitch said it expects such instances of indirect state interference in fuel prices to be temporary, and their impact on the standalone credit profiles (SCPs) of the OMCs - Indian Oil Corporation (IOC), Bharat Petroleum

Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPLC) - to be neutral over the long term.

"However, if crude oil prices are sustained beyond Fitch's base-case assumptions, then record-high retail fuel prices may limit the extent to which the changes are passed on, pressuring OMCs' credit metrics," it said without giving the reference price.

Fitch believes that freedom on retail fuel pricing continues to remain a key area, requiring clarity before the government's proposed divestment of BPCL can be concluded.

"India has traditionally used its control of the OMCs to carry out its socio-political agenda, affecting the competitiveness of private fuel retailers, which at a 10 per cent market share have limited pricing power and align their retail prices with the OMCs.

"We expect private fuel retailers to increase exports at better margins during times when domestic margins are under pressure," the rating agency said.

India's export of diesel rose by 12 per cent year-on-year in January-February 2022.

The ratings agency said the three fuel retailers are driven by the high likelihood of parental support, based on continued strong linkages.