No fuel price hike amid rising crude oil costs as elections loom: Moody's

Moodys Investors Service has forecasted that petrol and diesel prices in India are unlikely to see an increase despite the surge in raw material costs This decision is attributed to the upcoming general elections scheduled for next yearIndian Oil Corporation IOC Bharat Petroleum Corporation Ltd BPCL and Hindustan Petroleum Corporation Ltd HPCL three stateowned fuel retailers controlling roughly 90 percent of the market have maintained petrol and diesel prices at a standstill for an unprecedented 18 consecutive months This freeze has persisted even as the cost of crude oil increased significantly last year resulting in substantial losses in the first half of the 202223 fiscal year before a decline in oil prices restored profitabilityInternational oil prices have strengthened since August putting pressure on the margins of the three stateowned oil marketing companies in India Moodys reported High crude oil prices will weaken the profitability of the three stateowned oil marketing companies in India IOC BPCL and HPCLThe three companies will have limited flexibility to pass on higher raw material costs by increasing the retail selling prices of petrol and diesel in the current fiscal year because of upcoming elections in May 2024 Moodys addedAlso read Punjab CM Bhagwant Mann challenges opposition to live debate on all issuesThe marketing margins of these oil marketing companies OMCs have already significantly weakened since the high levels seen in the quarter ending June 30 2023 1Q fiscal 2024 Diesel marketing margins turned negative in August and petrol margins have also narrowed considerably over the same period as international prices have risenWhile crude oil prices surged by approximately 17 percent to over USD 90 per barrel in September compared to an average of USD 78 per barrel in 1Q fiscal 2024 Moodys noted that sustained high oil prices are unlikely due to weakening global growthMoodys highlighted that despite the decline in OMCs marketing margins an increase in gross refining margins GRMs has partially offset the impact Singapore GRMs the benchmark have improved since June mainly due to continued growth in liquid fuels consumption in the region and planned refinery outages which constrained the supply of petroleum productsMoodys expects GRMs and international prices of transportation fuels to moderate in the coming quarters as concerns over Chinas economic slowdown dampen demand while supply increases as refineries resume operations after scheduled maintenance activitiesDespite these challenges the OMCs fiscal 2024 earnings are anticipated to remain strong and higher than historical levels even if crude oil prices remain at current levels of USD 85 to USD 90 per barrel in the second half of fiscal 2024 Moodys stated that the OMCs will begin incurring EBITDA losses in the second half of fiscal 2024 if crude oil prices increase to around USD 100 per barrelStrong marketing margins for petrol and diesel were responsible for robust operating performance in 1Q fiscal 2024 The OMCs net realized prices on the sale of diesel and petrol have largely remained unchanged since April 2022 despite declining feedstock costs The price of Brent crude fell to USD 78 per barrel in 1Q fiscal 2024 down from USD 112 in 1Q fiscal 2023Moodys also assessed that among the three OMCs IOCL and BPCL are better positioned to withstand further increases in crude oil prices compared to HPCL The rating agency attributed this difference in their capacity to absorb rising feedstock costs to their varying business profiles IOCL and BPCL have largerscale operations with a high degree of integration between refining and marketing segments allowing them to navigate adverse changes in the operating environment betterOn the other hand HPCLs smaller scale and greater reliance on marketing operations make it more susceptible to unfavorable price movementsMoodys noted that despite capital spending and shareholder payments remaining high and rising crude oil prices leading to increased working capital requirements the three companies are expected to maintain leverage as measured by debtEBITDA well within rating thresholds through fiscal 2024Additionally the Indian governments announcement of Rs 30000 crore in capital support for the oil marketing sector in this years budget will bolster cash flows for the OMCs and partially cover their capital spending requirements IOCL and BPCL have already announced rights issues to the government in this regard However Moodys did not factor this into its projections as the timing and amount of such proceeds remain uncertain With inputs from PTI