OMCs Face 'Washout Quarter': Oil Sector Profits Plunge as Margins Squeeze Amid High Crude Prices

OMCs Face 'Washout Quarter': Oil Sector Profits Plunge as Margins Squeeze Amid High Crude Prices​

OMCs Expected to Deliver Losses as Operating Costs Rise​

Shares of oil marketing companies (OMCs) are under intense scrutiny after PL Capital issued a stern warning that the sector is headed for a "washout quarter" during the April-June period. This outlook suggests significant challenges ahead, primarily due to weak internal margins and prevailing operational costs.

The brokerage anticipates substantial declines in earnings despite some revenue growth. While aggregate sales in the oil and gas sector are expected to rise 23.6% year-on-year, PL Capital forecasts a massive EBITDA decline of 68.8%. This trajectory projects the sector reporting a net loss of ₹72.9 billion, a sharp reversal from the ₹554.8 billion profit reported in the previous year.

The report highlighted that OMCs are expected to report weak performance due to elevated crude prices, higher LPG under-recoveries, and severely pressured marketing margins. Gross marketing margins across the sector are anticipated to turn negative during this challenging quarter.

Specific Loss Projections for Major Oil Marketing Companies​

PL Capital has provided specific financial expectations for the three major OMCs. The brokerage expects Indian Oil Corp (IOC) to post a loss of ₹185.7 billion. Bharat Petroleum (BPCL) is forecasted to incur a loss of ₹124 billion. Hindustan Petroleum (HPCL) is also expected to report losses, estimated at ₹125.5 billion.

The constraints facing the refiners are multifaceted. Although global refining cracks remain elevated, allowing for potentially high profits, refiners are unlikely to reap full benefits. This constraint is attributed to factors such as the special additional excise duty (SAED), capped domestic refinery transfer prices, and inventory losses.

Upstream Segment Poised for Growth Amid Crude Price Gains​

In contrast to the challenges faced by downstream OMCs, upstream companies are expected to benefit significantly from the current market dynamics. Companies like ONGC and Oil India are anticipated to gain from higher crude oil realisations.

However, PL Capital cautioned that these gains might be partially offset by the restoration of royalty rates. Despite this potential headwind, the brokerage projects strong growth for the upstream segment. Revenue is expected to grow 38.9% year-on-year, with a corresponding EBITDA growth rate projected at 48.9%.

Gas Distributors Face Pressure as Input Costs Surge​

City gas distributors are also facing considerable operational headwinds. PL Capital notes that higher input costs continue to exert pressure on these firms. This trend is occurring despite the price hikes implemented by companies in an attempt to mitigate rising expenses.

Gas distribution businesses are expected to see significant declines in profitability. For Indraprastha Gas, EBITDA and profit are projected to decline 45.4% from a year ago. Mahanagar Gas is also facing pressure, with its corresponding profit expected to fall by 48.1%.

Preferred Stocks: PL Capital Favors CNG and PNG Growth​

Despite the sector-wide pessimism surrounding OMCs, PL Capital maintains positive views on specific gas distributors. The brokerage continues to favor both Mahanagar Gas and Indraprastha Gas stock picks in this sector.

This conviction is based on anticipated strong volume growth in Compressed Natural Gas (CNG) and Piped Natural Gas (PNG). These companies are expected to benefit as the availability of natural gas gradually normalizes across the market.