Return of Dynamic Pricing may Ease Concerns Over OMC Valuations
Economic Times, Delhi   09-Jun-2020

ET Intelligence Group: Stocks of state-owned oil marketing companies (OMCs) including IOCL, BPCL and HPCLNSE -1.99 % increased by 4-7% on Monday following the resumption of dynamic pricing for retail fuels after a gap of nearly three months. Among them, Bharat Petroleum Corp (BPCL) stands to gain more given its superior operating performance and the ongoing divestment process.

The fuel marketing segment constitutes nearly 50-60% of the total operating profits of the state-owned OMCs. Every 50 paise change in the marketing margins may impact their annual projected earnings by 11-21%. The continuity of dynamic fuel prices means OMCs may be able to maintain marketing margins, thereby offering much-needed revenue visibility. Earlier, OMCs had stopped the practice of changing fuel prices daily due to rising fluctuations in the international crude oil prices.

The marketing margin, which is broadly the difference between the prices of fuels and crude oil, had shot up to Rs 19-20 per litre in April compared with a usual range of Rs 2-2.5 per litre since retail fuel prices remained steady though the price of Indian crude basket dropped to $19 per barrel from $33 in March.

However, the margins compressed significantly after the Union government raised the excise duty on fuels. They even turned negative over the past few days after crude prices increased while retail fuel prices remained unchanged. According to BPCL's management commentary after the March quarter results, it would be able to maintain the marketing margin at FY19 level. This may offset decline in volumes during the lockdown.

Another positive factor is the pickup in retail fuel sales after a phased relaxation of lockdown in May. BPCL's refinery utilisation improved to 83% in May from 63% in April. The company expects 100% utilisation in the early part of the September 2020 quarter.

In addition, the receivables of OMCs from the government have reduced due to timely payments and lower crude prices. BPCL's outstanding receivables dropped to Rs 4,800 crore in FY20, which was nearly half of the previous fiscal's . Despite the government's free cylinder scheme, the outstanding at May 2020-end was at Rs 3,800 crore.

On the flip side, BPCL expects a spike in borrowings due to higher working capital requirement amid the lockdown. Its borrowings shot up to Rs 44,000 crore at the end of March 2020 from Rs 27,000 crore a year ago. However, this is expected to be a temporary phase.

On Monday, BPCL's stock gained 6.6%, the highest among peers. At the day's closing price of Rs 394.3 on the BSE, the stock was traded at a one-year forward price-earnings multiple of 11 compared with the long-term average of 14.5. A wider distribution network across the country, higher revenue visibility due to better marketing margins and the government's divestment initiative are expected to support the stock's valuation in the medium term.