OMCs move to cushion retail fuel prices ahead of General Elections

New Delhi: State-run oil and marketing companies Indian Oil Corp (IOC), Bharat Petroleum Corp (BPCL) and Hindustan Petroleum Corp (HPCL) are making plans to create a buffer against any uncertainty on retail fuel prices as valuations in the sector turn appealing ahead of this year's General Elections. According to Kotak Institutional Equities, gross marketing margins — the difference between retail selling prices and refinery transfer prices after deducting dealer commission and taxes — reached record heights on petrol and diesel, touching Rs 8.2 by December last year.

On the normalised level, gross marketing margins usually range between Rs 1.5-2.5 as marketing divisions of OMCs account for 60-70 percent of the total operating profit. OMCs have removed refinery transfer price from price build-up of petrol and diesel, disabling them from determining the gross marketing margins on a regular basis.

The record marketing margins set by companies demonstrate that the drop in crude prices has been absorbed, though the only partial benefit of this has been passed on to the consumer. Indian crude basket dropped 28 percent from the October 4 high of US$85.1 per barrel, while the fuel prices were slashed by 18 percent in the same time period. Shares in India's top three OMCs surged last year. IOC, India's biggest state-owned refiner, grew by 7.81 percent on the NSE. Moreover, BPCL and HPCL grew 7.44 percent and 8.57 percent, respectively.

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