Oil Inc. 1HFY05: A mixed bag - Views on News from Equitymaster

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Oil Inc. 1HFY05: A mixed bag

Dec 13, 2004

In the thick of the things…
For domestic oil marketing companies, the first half of FY05 was a mixed bag with topline witnessing strong growth while the companies suffering on account of policies on the bottomline front. As a matter of fact, while the topline witnessed robust growth of over 19% YoY, the bottomline grew by a meager 3% YoY during the period.

Spectrum of coverage
Along with the three major oil-marketing companies (HPCL, BPCL and IOC), we have also included ONGC in this analysis. During the period, oil-marketing companies witnessed major losses on account of a price freeze on the retail marketing side, while input costs rose by nearly 50%.

Leading oil companies
(Rs m) 1HFY04 1HFY05 (%) change
Sales 1,168,588 1,391,433 19.1%
Op. profits 160,565 179,856 12.0%
OPM (%) 13.7% 12.9%  
Net profits 91,085 94,141 3.4%
NPM (%) 7.8% 6.8%  

What has affected performance?
High volumes growth: The country witnessed a 6% YoY growth in consumption of petroleum products during the period on the back of robust economic activity. This growth was led by a nearly 20% rise in demand for diesel, which accounts for nearly 40% of the petroleum products’ basket. At the same time, LPG and petrol demand rose by 9% YoY. Rising volumes helped these companies put up an improved topline growth.

Subsidies dent margins: Operating margins declined by 70 basis points for the companies despite a sharp increase in realizations. This was due to the fact that these companies had to bear a significant burden of subsidies on LPG and kerosene as the government reduced its share of the same. Further, product prices in the international markets touched new highs, resulting in higher costs at the refinery gate. Also, product prices in certain states were kept on a freeze due to political compulsions. As a result, the oil marketing companies had to sell products at a loss in many states. At the same time, upstream major, ONGC had to supply crude oil at discount prices to contribute towards its share of subsidies on LPG and kerosene. Rising gas prices in the international markets further led to higher subsidies for ONGC.

What to expect?
The government’s recent decisions regarding product prices and duty cuts have helped the oil marketing companies cover some lost ground. Further, crude oil prices are on a decline, which would help the oil marketing companies reduce input costs. Growing retail demand has also resulted in strengthening of the margins of late. High refining margins due to firm international product prices are likely to add to the bottomline. However, concerns regarding large capex plans lined up by the oil companies and also political interference are causes of concern.

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