How do excise cuts change India’s oil sector math?

Despite Brent crude at $115 a barrel, shares of oil marketing companies (OMCs) Indian Oil Corp Ltd (IOCL), Hindustan Petroleum Corp Ltd (HPCL), and Bharat Petroleum Corp Ltd (BPCL) held up better than the broader market during Monday’s selloff. Markets see the government’s ₹10-per-litre excise duty cut from Friday as exactly what the doctor ordered for a sector staring at steep under-recoveries: ₹26 per litre and ₹82 per litre for petrol and diesel, respectively.The policy move could cost the exchequer nearly ₹14,000 crore in revenue per month.

But it has shifted the breakeven crude price for OMCs refining and retail operations from about $90 a barrel earlier to roughly $106 a barrel now if retail prices of petrol & diesel stay unchanged, said a report by CareEdge Ratings. That is a decent cushion, given crude’s jump from about $70 to $115 a barrel this month.That said, exports, which had provided respite amid indirectly capped domestic pump prices, have become less lucrative.

Export duties of ₹21.5 a litre on diesel and ₹29.5 a litre on aviation turbine fuel (ATF) have been imposed to ensure domestic fuel availability, and partially offset revenue losses to the government. Reports suggest that Reliance’s SEZ refinery is likely to be left out of the duty net.

The stock held up better than those of OMCs on Monday.But all this just means the excise adjustment has only reduced OMCs’ stress, not eliminated it. According to a report by JM Financial Institutional Securities, “at spot Brent of around $111/bbl, OMCs auto-fuel integrated gross margin is still ~ ₹15/litre below historical level (at negative ₹2.5/litre versus historical average of positive ₹12.5/litre); this is likely to result in decrease in OMCs book value by