How do you see the outlook for oil marketing companies? On the one hand, Brent is continuously under check, under $80 now and on the other hand, these OMCs are transforming beyond just being distributors of traditional fuel as well.
MK Surana: The stage looks good as of today because the crude is below the psychological mark of $80. The global demand weakness as per many of the agencies who forecast is getting moderated from all the three agencies who have been doing IEA, EIA, or OPEC. The Indian demand is good on the overall while the global demand is lower. People have started recognising the weaknesses in China’s demand growing in the current phase.
On the other hand, there is uptick in the GRMs, like the Singapore GRM is around $5 now in August in these 20-25 days, compared to $4.6 in Q2 or $3.5 in Q1. The diesel and petrol cracks are reasonably okay, $13 on HSD and around $11 on MS. So, all these things put together makes a good setting for the oil marketing companies. Crude below $80 and the cracks at $13 for HSD and $11 for MS, make OMCs well placed on overall setup.
In addition to that, many of these OMCs are going on a new path. There is a growth potential in that and we can say that OMCs are in a stage where there is a growth potential with a surety of the existing cash. Of course, the overhangs on the pricing part continues to be there, the possibility or not possibility of some interventions.
But over last three years, the market has seen the robustness and the resilience of these companies to navigate through various challenges which comes whether it was COVID, whether the high and low crude prices, whether very high cracks and very low cracks also. So, I think that overall the setup is good and the possibilities of the rate cuts and the good monsoon and the festive season coming in, the demand growth also should be good, at least in the Indian market.
July growth was almost more than 7% with MS and HSD, MS was almost 10%, LPG was also 10%. So, overall, it looks good.How much would marketing margins have increased for some of these companies and would higher marketing margin make up for the under-recovery in LPG?
MK Surana: We need to see this on an integrated margins because over a period we have seen that the prices had been kept constant and there are reasons for why it should be. We can always debate on whether it should be or it should not be, whether it should be completely free, whether it should not be. But on the integrated basis, it looks reasonable right now. There will be under-recovery in some products, and slight over-recovery in others but if you put together the integrated margin of refinery and marketing together, it is reasonable.
On a broader scale, for the next three to five years, how do you see the profitability? There are Rs 18,000-20,000 crore annual profits, in some cases Rs 30,000 crore as in the case of BPCL. How many levers do OMCs have? They are doing tie-ups with EV companies or OEMs for charging infrastructure. There are petrochemical forays happening. Lubricants is one business. Can the OMC numbers improve meaningfully in five years?
MK Surana: We need to see the capex cycle of the companies and they are different for all the three OMCs as of today. In some case, the projects are about to be commissioned or just commissioned. In some cases, the products are being launched now. And considering the time period which it needs to fructify these projects, the different companies will have different trajectory for incremental profitability growth in the time to come.
In the near term the crude prices are likely to be benign and that being so, the marketing margins should be reasonable and that will help these companies to take up the projects and fructify the projects which are already taken up on the traditional business lines, which we had, like refinery or pipelines or marketing setup. The new growth engines which are coming, especially in the renewables, greens and I will say the middle level, the petchem which is not absolutely new, but all the companies have been integrating the petrochemicals with the refineries.
While the petchem margins are low currently, they should improve as the demand picks up and in that case the existing growth engines, existing money spinners should make money and that should also help in fuelling the funding, the new capex cycle for the greener, etc.
In three- to five-years’ time, the new business lines like green and alternative energy and renewables, etc may mature. On the EV front, there is always a narration whether hybrid is better or the pure EV cycle is better, but the OMCs are better placed to play both the things, whether it is hybrid thing where it is just a combination of their existing business, plus the EV charging setup which they are putting anyway.
If it is pure out and out EV also, it can be put up. My personal thinking is probably the pure EV play may take some more time and the hybrid may be more common in the near future to come and that augurs well for the OMCs.
