Shares of oil marketing companies such as Hindustan Petroleum (HPCL, Bharat Petroleum (BPCL) and Indian Oil (IOC) are up 22 - 29 per cent from their May lows. As the restart of economic activities bodes well for demand recovery post lockdown, the auto fuel price hikes undertaken by these OMCs too, have been taken positively by investors. These have improved confidence on marketing margins on retail fuels like petrol and diesel, in view of the rise in crude oil prices. Analysts now believe that marketing margins of these state-owned companies will remain firm as they await more price hikes in coming days in line with the rise in global oil prices.

Over the last three-four days, OMCs have increased the per litre price of gasoline and diesel by a total of Rs 2.14 and Rs 2.23, respectively. This is on the back of a surge in oil prices with major oil producing countries following production discipline. Brent prices in the last three weeks have jumped by 30 per cent to around $40 per barrel.

For the OMCs, the cost in their marketing segment is based on the last 15-day average product (crude and crack) prices of gasoline and diesel in the international market, which explains the recent price hikes undertaken by them. With the rise in crude prices, analysts expect OMCs to undertake total price hikes to the tune of Rs 4 per litre on auto fuels. This should not be difficult given that OMCs have already raised prices by more than half the required figure, say analysts.

The price hikes will ensure that marketing margins are maintained at Rs 3 per litre levels. Based on calculations of crude oil prices and hikes taken so far, the margins may look lower, but overall auto-fuel margins may still be higher. Because of an increasing oil price environment, OMCs will benefit from inventory gains (generally 10-15 days of stock) in the marketing business. In the previous year, especially the March quarter, OMCs suffered inventory losses due to falling oil prices. This is also a reason why analysts expect a sharp increase in earnings in FY22.

Prior to the excise hike in the first week of May, OMCs were making Rs 17-19 per litre of gross marketing margins (against normal levels of Rs 3) on auto fuels. Though gains may not be significant in the absence of low volumes, it will help mitigate some of the earlier inventory losses, which bodes well for June quarter and the year as a whole, believe analysts.

“The assumption for gross marketing margin of Rs 3.3 per litre remains unchanged with net margin at Rs 1.5 per litre for FY21 and FY22,” said analysts at Motilal Oswal Financial Services.

Probal Sen and Akshay Mane of Centrum Broking, too, expect marketing earnings to remain robust in both FY21 and FY22. With Brent crude prices settling in $35-40 range (eliminating the prospects of inventory losses) and marketing business earnings to benefit from higher margins, they see earnings of IOC, HPCL and BPCL growing by 27.3 per cent, 14.6 per cent and 24.2 per cent, respectively, between FY20 and FY22.

Though refining margins will remain soft, this business will also benefit from low-cost inventory. Further, aggressive discounts available for Indian crude buyers are a boon, say analysts. The resumption in demand is also positive and as activity levels pick up over next six months, refining margins may gain by second half FY21, feel analysts.

In fact, on Wednesday, IOC said that improved demand for petroleum products in May resulted in higher capacity utilisation of its refineries to the extent of 75 - 80 per cent and the same is being ramped up further.

Amongst OMCs, HPCL has a larger share of retail sales in its portfolio, and should benefit the most from higher marketing margins. IOC, on the other hand, has a larger share of refining and will get respite from lower inventory losses as well as marketing margins. For BPCL, the prospects now more hinge on government's proposed divestment. Analysts at Nomura say that while they are less sanguine on valuation and timelines, they believe privatisation remains a key catalyst.