India’s oil marketing companies (OMCs) are gearing up for a slight dip in their operating profit in fiscal 2025, according to a report by CRISIL Ratings. The expected drop, from USD 20 per barrel in fiscal 2024 to USD 12-14 per barrel, is attributed to several factors, including discounts on Russian crude oil, a softening of diesel spreads, and inventory losses.
Despite this decline, the operating profit is projected to remain comfortably higher than the average of USD 9-11 per barrel observed over the past decade. This positive outlook will partially support OMCs’ ambitious capital expenditure (capex) plans, which are crucial for expanding their operations and meeting growing domestic demand.
OMCs earn their revenue through two primary avenues: refining and marketing. In refining, they generate profit based on the gross refining margin (GRM), which is the difference between the value of refined products at the refinery gate and the cost of crude oil used in production. The marketing channel generates profit through margins on petrol, diesel, and other petroleum products sold.
While oil prices experienced a year-on-year decline of 11% in fiscal 2024, settling at an average of USD 83 per barrel, the impact on overall GRM was relatively marginal, registering at USD 12 per barrel. This stability can be attributed to strong core margins driven by high diesel spreads, fueled by geopolitical uncertainties that disrupted global energy supply chains and kept international prices elevated.
Furthermore, maintaining stable retail fuel prices played a significant role in generating healthy marketing margins (net of operating expenses) of Rs 4 per litre or USD 8 per barrel, resulting in an overall profit of USD 20 per barrel for the year.
Looking ahead, CRISIL Ratings predicts that GRMs will face a substantial correction in the current fiscal year, averaging USD 3-5 per barrel. This is attributed to factors like stabilizing diesel spreads as global refineries ramp up production while consumption slows down. Additionally, the report highlights the impact of discounts on Russian crude oil, which have been reduced, and projects oil prices to average USD 75 per barrel in the second half of the fiscal year, down from USD 82 per barrel in the first half. This is expected to lead to inventory losses.
However, the report anticipates that marketing margins (net of operating expenses) will remain stable at Rs 4.5 per litre (or USD 9 per barrel), assuming no reduction in retail fuel prices.
The anticipated cash accrual of Rs 52,000-54,000 crore will play a key role in partially funding OMCs’ planned capex of Rs 90,000 crore. This substantial investment is primarily directed towards brownfield capacity expansion, with approximately 80% allocated to meeting domestic demand for petroleum and petrochemical products. The remaining portion is dedicated to developing product pipelines, marketing infrastructure, and green energy initiatives.
While profits may moderate year-on-year, CRISIL Ratings expects the industry to maintain its capex, funded partly by debt. This is likely to result in an increase in the debt-to-Ebitda ratio of CRISIL-rated OMCs to 3 times in fiscal 2025, from 1.9 times in fiscal 2024. Nonetheless, the sector’s credit profiles are expected to remain strong, supported by its strategic importance and the benefits of government ownership.
The market intelligence firm cautions that significant volatility in crude oil prices, without corresponding adjustments for end-consumers, could pose downside risks to these expectations.
