The refining sector - Where are the margins? - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks


Login Failure
(Please do not use this option on a public machine)
  Sign Up | Forgot Password?  

The refining sector - Where are the margins?

Apr 11, 2000

The domestic refining sector witnessed a significant build up in capacity over the last couple of years. Apart from capacity increases in the public sector, private sector companies, led by Reliance Petroleum (27 million tonnes) and Mangalore Refinery & Petrochemicals Limited (9 million tonnes) significantly added to the productive capacity of the sector. However, is the business as attractive as it seems? Lets tackle this issue from the point of view of margins. What determines the margins for the sector? (Before venturing into this it needs to be mentioned that atleast 70% of the revenues of refining companies are from products whose prices are controlled by the government and hence profit margins tend to depend more on factors other than product prices).

A key determinant of refining margins is the import duty differential between crude oil and finished products (like diesel). In India, which imports around 70% of its crude requirements, the duty differential, according to one estimate is just 7% (post budget). This tariff protection is too thin and puts the entire industry at risk to the threat of large-scale imports. The situation seems grimmer if one considers the large buildup in domestic refining capacity.

Nevertheless the refining sector has seen a lot of activity in recent months. This is mainly due to the proposals to deregulate the sector by 2002, permit refineries to enter into marketing (the most lucrative part of the business by one estimate marketing margins post deregulation in the first year could itself increase by almost 200%) and reduce subsidies on petroleum products. Importantly, the government has committed itself to raise the tariff protection to 12-15%.

The refining sector at best offers a mixed bag. If one were to take into account the effect of enhanced competition in pricing of products, margins would be even thinner in years to come. But then the proposed measures have the potential to lift the fortunes of the sector dramatically.

Equitymaster requests your view! Post a comment on "The refining sector - Where are the margins?". Click here!


More Views on News

GAIL Misses Earnings Estimates. Company Ditches Plan to Split (Views On News)

Jun 10, 2021

GAIL's earnings and proposal to monetise pipelines through InvIT route, puts stock in focus.

ONGC Hits 52-Week High: Key Triggers that Drove the Stock This Week (Views On News)

Jun 5, 2021

ONGC stock at 52-week highs amid the recent rally in crude oil prices.

Adani Enterprises Hits New Record High. Marketcap Surpasses Rs 1.5 tn (Views On News)

Jun 2, 2021

Adani Enterprises share price is up 925.7% in one year. Can it go higher?

Here's Why Tide Water Oil Shares Are Rallying (Views On News)

Jun 2, 2021

The three reasons why Tide Water Oil shares have zoomed 1.5 times in less than a month.

What's Driving the Rally in Reliance Shares? (Views On News)

Jun 1, 2021

The recent run up in Reliance Industries shares helps Nifty post new record highs.

More Views on News

Most Popular

Hotel Stocks Will Reward Investors (Fast Profits Daily)

Jun 8, 2021

This is why I'm bullish on the hotel and hospitality sector.

My 'Unlock' Investments (Fast Profits Daily)

Jun 11, 2021

The best unlock investments you can make in the market.

The Most Visible Sign of India's Revival is on Two Wheels (Profit Hunter)

Jun 9, 2021

Investing in the best stocks could result in wealth compounding on a massive scale.

How I Discovered a 400-Year-Old Open Secret to Extreme Wealth (Profit Hunter)

Jun 11, 2021

Charlie Munger's open secret about investing success.


India's #1 Trader
Reveals His Secrets

Secret To Increasing Your Trading Profits Today
Get this Special Report,
The Secret to Increasing Your Trading Profits Today, Now!
We will never sell or rent your email id.
Please read our Terms


Jun 18, 2021 (Close)