Kotak Institutional Equities has issued a stark warning regarding the financial health of Indian fuel retailers, stating that even after a recent Rs 3 per litre increase in petrol and diesel prices, the industry is still grappling with significant under-recoveries. The brokerage firm highlighted that the gap between actual retail prices and the required market-determined prices remains wide, primarily due to the sustained surge in global crude oil prices.
Under-Recovery Crisis Deepens
According to Kotak's analysis, the recent price hike, implemented in early March, was a step in the right direction but insufficient to offset the mounting losses. The under-recovery, which refers to the difference between the cost of imported crude oil and the retail selling price, has been exacerbated by the government's reluctance to allow full pass-through of international prices to consumers. This has put immense pressure on state-owned oil marketing companies (OMCs) such as Indian Oil Corporation, Bharat Petroleum, and Hindustan Petroleum.
Crude Oil Prices Remain Elevated
The warning comes as crude oil prices continue to hover around elevated levels, with Brent crude trading above $120 per barrel. Kotak noted that for every $10 per barrel increase in crude oil prices, the under-recovery for OMCs could rise by approximately Rs 1.5-2 per litre. Given the current scenario, the firm estimates that the under-recovery on petrol and diesel could be as high as Rs 10-12 per litre, even after accounting for the recent hike.
Impact on OMCs and Consumers
The persistent under-recoveries have already taken a toll on the financial performance of OMCs, with many reporting lower margins and reduced profitability. Kotak cautioned that if the government does not allow further price increases or provide compensation, the situation could worsen, potentially leading to higher borrowing costs and strained balance sheets. For consumers, the limited price hike offers little respite, as fuel prices remain elevated, impacting inflation and household budgets.
Government's Dilemma
The government faces a delicate balancing act between protecting consumers from high fuel prices and ensuring the viability of OMCs. While the recent Rs 3 per litre hike was a move towards market alignment, analysts argue that more frequent and substantial increases are needed to prevent under-recoveries from spiraling. However, with state elections looming and inflation concerns, the government may be hesitant to implement aggressive price adjustments.
Market Outlook
Kotak's report suggests that the outlook for OMCs remains challenging in the near term, with crude oil prices expected to stay elevated due to geopolitical tensions and supply constraints. The firm recommends that investors monitor government policy actions closely, as any announcement regarding subsidy or price deregulation could significantly impact the sector. In the absence of corrective measures, the under-recovery issue could persist, creating headwinds for the entire fuel retail industry.
