The fall in international crude oil prices will ease marketing losses for the three state-owned oil retailers — Indian Oil Corporation Limited (IOCL), Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL), according to Moody's Investors Service.

Marketing margins of state-run fuel retailers have turned positive for petrol, while marketing losses on diesel have narrowed, the ratings agency says in a report.

IOCL, BPCL and HPCL together control around 90% of the fuel retailing network in India.

This comes at a time when rising interest rates and concerns of an economic slowdown have weakened demand for oil products and cooled international fuel prices.

Significant marketing losses earlier in the year will drag on earnings for the three state-owned refining and marketing companies in the financial year ending March 31, 2023, the ratings agency says. Net realised prices for petrol and diesel, which account for almost 55%-60% of product sales for the three companies, did not increase at the same pace as international prices, resulting in EBITDA losses for the six months through September.

Moody's expects marketing margins to normalise only when the refining and marketing companies' net realised prices for petrol and diesel are allowed to freely align with international prices. "This will likely happen only in 2024 after the conclusion of general elections in India," says the ratings firm.

The Indian rupee's depreciation against the US dollar further hit profits as oil prices and a large portion of refiners' borrowings are in dollars, it says.

Among the three state-owned entities, HPCL's marketing exposure is the highest. The company produces around 65%-70% of its total sales volumes in-house and purchases the balance externally, says Moody's. This implies that HPCL has had to buy almost 30% of its petrol and diesel sale volumes at international prices but sell these volumes at domestic prices.

Even though petrol and diesel prices in India are deregulated, net realised prices for the state-owned refining and marketing companies have remained unchanged since April 2022 as the government sought to limit the effects of inflation on consumers.

Frequent government interference and the lack of a transparent and predictable pricing regime in the country is credit negative for the refining and marketing sector, says Moody's.

India's windfall tax on exports of locally-produced oil has helped reduce the state-owned refining and marketing companies' marketing losses, says Moody's. "The three companies have been able to secure a discount of an amount equal to the export duties on their purchases from private-sector refiners, which lowered the cost of buying the fuels. HPCL has benefited the most from these discounts, because it has the highest proportion of external purchases among the three companies," it adds.

The state-owned refining and marketing companies will also benefit from their continued purchases of Russian crude oil, according to Moody's. Urals — the Russian crude benchmark — has been trading at a discount to Brent crude since the onset of the Ukraine conflict. Russia has become a leading crude oil supplier to the Indian refiners. Before the conflict, Russian crude accounted for less than 2% of the total feedstock for the Indian refiners, but this has since increased to around 15%-20%.

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