IOCL To BPCL — Oil Firms' Dividend Yields Could Take A Hit In FY25

Indian Oil Corp., Bharat Petroleum Corp., and Hindustan Petroleum Corp. stocks have surged between 79-102% over the past year, emerging as top dividend performers. But faltering refining segments, soft marketing margins and weak financials could affect dividend yields of the companies in fiscal 2025.

This, even as the same factors had boosted financials for the oil marketing firms in fiscal 2024.

Here is a look at why there has been a divergence from positive trends.

The tailwinds that had buoyed oil marketing companies are now turning into headwinds. A trio of troubling trends emerged across the sector in the first quarter results.

Firstly, the refining segment has faltered. Gross refining margins for these companies fell by 23-38% year-on-year, largely due to a drop in benchmark Singapore GRMs. Currently trading at $5.40 per barrel, Singapore GRMs averaged $3.40 in Q1 FY25, down from $7.30 in Q4 FY24 and $6.60 over FY24.

Secondly, marketing margins have softened across the board. This shift follows a Rs 2 per liters price cut on petrol and diesel enacted in March 2024.

Lastly, financials of these companies have been hit hard by LNG under-recoveries — loss from selling LNG at subsidised rates below actual costs. Indian Oil, Hindustan Petroleum, and Bharat Petroleum reported under-recoveries of Rs 5,156 crore, Rs 2,500 crore, and Rs 2,000 crore, respectively in the first quarter of fiscal 2025.

Oil companies saw net profits plummet by 30-88% in the April-June quarter, with Hindustan Petroleum facing the sharpest drop. This slump in earnings translates to reduced cash flow, directly affecting their ability to maintain dividend payouts.

Bharat Petroleum and Hindustan Petroleum have upped their FY25 capex budgets, by 40.15% and 5%, respectively. Hindustan Petroleum has already invested Rs 2,000 crore in the quarter, targeting an annual capex of Rs 14,000-15,000 crore for the coming years. Bharat Petroleum spent Rs 2,600 crore in Q1 FY25 and plans to invest Rs 16,400 crore for the full year.

Increased capital expenditures could dampen dividend payouts, as substantial investments in infrastructure reduce available cash for distributions. The true impact will depend on each company’s financial health, dividend policies, and industry conditions.

During the fiscal ended March, a robust refining segment had helped OMCs thrive, with gross refining margins averaging between $10 and $12 per barrel, significantly outshining the benchmark Singapore GRMs, which hovered around $6.60.

The fiscal was also marked by substantial debt reduction for these firms, ranging from 5-20%.

Oil companies also saw a surge in cash flow from operations, during the period. Indian Oil and Bharat Petroleum's cash flow more than double, reaching Rs 67,250.32 crore and Rs 34,692.98 crore, respectively. Hindustan Petroleum, which had faced negative cash flows in FY23, turned the tide with over Rs 20,000 crore in FY24.

Capital expenditure cycle from FY22 to FY24 remained relatively muted, with Indian Oil being the notable exception. This restrained capex environment generally boosts a company’s dividend-paying potential, as it allows for greater cash retention and enhances free cash flow.

Dividend yield in the last 12 months stood the highest for Indian Oil Corp. at 9%.

The dividend per share values for the oil marketing companies have also increased over fiscals 2019 to 2024. It stood at Rs 12 for Indian Oil, Rs 21 for Bharat Petroleum Corp., and Rs 15 for Hindustan Petroleum Corp. in FY24. This compares to dividend per share of Rs 6, Rs 9.5, and Rs 10.6, respectively in the fiscal ended March 2019.