Daily pricing to improve OMCs’ marketing margins

The move is a positive for these firms, which have been struggling with declining refining margins

The Street considers the daily pricing of diesel and petrol a positive step for oil-marketing companies (OMCs) because it can boost their marketing margins. While the pilot project on daily pricing for diesel and petrol is said to start next month, it will gradually be expanded to cover the entire country. Analysts at Jefferies say that the move should raise confidence over the sustainability of deregulation and is a positive as far as the outlook for marketing margins is concerned. It is not surprising then that the stock prices of Bharat Petroleum Corporation and Indian Oil Corporation (IOC) hit fresh 52-week highs on Thursday while the Hindustan Petroleum Corporation scrip trades near its yearly highs.

While the OMCs have been reviewing prices every fortnight, daily pricing decisions are more beneficial. It can help OMCs pass on any hikes (depending on crude oil prices or rupee movement) on a daily basis and customer acceptance will be better. Also it will help the distribution network and retail outlets manage inventory in a better manner, say analysts. Further, the move lowers the possibility of government intervention or influence. OMCs have refrained from raising prices around major state elections, including the most recent UP elections, say analysts. Daily pricing should give OMCs better flexibility and control, which should be a positive for marketing margins in the medium to long term, say analysts at Jefferies.

The OMCs in the recent past had underperformed on the bourses with concerns on declining refining margins, coupled with softening demand for diesel. Singapore gross refining margins in the March quarter averaged $6.4 per barrel, down 5 per cent sequentially and 17 per cent year-on-year. Analysts at ICICI Securities say that marketing costs have risen to ~1.57 per litre in April as the freight cost rose in line with oil price recovery and they see rising marketing costs as yet another headwind for net auto fuel marketing margins for OMCs. Thus, the pilot project for daily fuel hikes comes at an appropriate time to boost Street sentiment around these scrips. Analysts at Credit Suisse say that a transition to daily pricing may allow marketing margin expansion in the long term. According to their estimates, an increase of 10 paise per litre in diesel margins adds 1.4-2.5 per cent earning per share of the OMCs, while a similar increase in petrol margins is 0.5 per cent to 1.1 per cent. Further, automated outlets make it easier for OMCs to implement daily pricing and BPCL leads peers with over 60 per cent automated outlets while HPCL has the lowest, at about 20 per cent, say analysts.

Analysts see Indian Oil benefitting from the rampup of its new Paradip refinery too. Thus, it is not surprising that both Bharat Petroleum Corporation and IOC gained more than Hindustan Petroleum Corporation.

While there are positives, the Street will keep an eye out for how the implementation pans out as well as the development on the merger of an OMC with ONGC.