Sharper cut in fuel prices possible if oil cos reduce margin

New Delhi, March 16 (IANS) Consumers may still get sharper cuts in retail prices of petrol and diesel if oil marketing companies decide to reduce their margins on selling auto fuels that has increased substantially due to abnormally low global oil prices.

According to an ICICI Securities report, net auto fuel margin of oil marketing companies (OMCs) would be super normal at Rs 5 per litre on March 16, 2020 despite OMCs absorbing the Rs 3 per litre excise duty hike. This would mean that state-owned companies still have room to cut petrol and diesel prices if they are willing to sacrifice supernormal profits coming from higher margins.

Government on Saturday raised excise duty on petrol and diesel by Rs 3 per litre but OMCs factored this increase in cost and still reduced retail price of the two products marginally. But as it pans out now, OMCs have very large window to provide relief to consumers.

The brokerage report said that the hike in excise duty on auto fuels by Rs 3 per litre being absorbed by OMCs has led to fall in net marketing margin to Rs 0.33 litre on March 15 from Rs 3.68 per litre on March 13.

However, plunge in refinery transfer price (RTP), based on 15-day rolling average and changed fortnightly, by Rs 4.4-5.5 per litre would boost net margin on March 16 to Rs 5.09 per litre as reduced by the price cut, the report said.

At latest prices, net margin of OMCs works out to Rs 9.01 per litre (price cuts will bring it down over the next 15 days) suggesting net margins are likely to remain very high even in early-April, 2020.

Net marketing margin is Rs 2.09/litre in FY20 till date and was Rs 1.83/litre in FY19 vs Rs 0.97-1.06/litre in FY15-FY18, suggesting new normal is Rs 2/litre.

“The higher net margin calls for OMCs to cut petrol and diesel retail price sharply to benefit consumers and industry to lower cost and boost consumption and demand,” said an oil sector analyst.

An official of OMC, however, said the pricing decisions should be taken while also considering volatility in oil markets but retail price of petrol and diesel is still following international price movements.

ICICI Securities said that they have raised FY21E on auto fuel net marketing margin to Rs 1.75/litre from Rs 1.5/litre earlier. Further upside is not ruled out; upside to OMCs' FY21E earning per share (EPS) at a margin of Rs 2.0-2.5/litre would be 8-29 per cent with HPCL being most sensitive to margins, the report said.

Though gross refinery margins on OMCs are also expected to remain high, ICICI Securities has cut down the projection for FY21 as demand shock due to coronavirus pandemic remains a concern. We have, therefore, cut OMCs' FY21E GRM to $4.5-5.5/barrel from $5.0-6.0/barrel earlier, it said.



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