Why Lack Of Government Support On LPG Loss Could Hit Oil Firms Hard
Higher production costs, as well as import costs, exert pressure on the companies' profitability in the segment as the domestic selling prices remain capped.
Oil marketing companies saw weaker earnings in the first quarter of fiscal 2025, mainly on the back of loss on cooking gas sales ranging from Rs 2,000 crore to Rs 4,000 crore.
At the run-rate seen in the April-June quarter, companies like Indian Oil Corp., Bharat Petroleum Corp. and Hindustan Petroleum Corp. could record losses from liquified petroleum gas sales to the tune of Rs 8,000 crore to Rs 16,400 crore, as per NDTV Profit's calculations.
This is why the LPG subsidy provided by the government of India in fiscal 2025 is important for the profitability of these oil companies.
Why Are Companies Incurring Losses On LPG?
Currently, LPG prices in India are subsidised to ensure affordability for domestic consumers.
Oil companies like Indian Oil, Bharat Petroleum and Hindustan Petroleum not only produce their own LPG, but also import it from international sources and sell them domestically.
Thus, higher production costs, as well as import costs, exert pressure on the companies' profitability in the segment as the domestic selling prices remain capped.
Government Support
The government of India has provided oil marketing companies one-time subsidies as a part of a buffer mechanism. In fiscal 2023, when LPG losses of companies swelled up to around Rs 25,000 crore in the quarter, due to rise in international LPG prices, the government of India announced a one-time budget subsidy of Rs 22,000 crore to cover the loss.
While a similar subsidy announcement was expected in the 2024 Union Budget, no provision of the same disappointed the street.
Potential Losses
In the quarter ended June 30, 2024, Indian Oil, Bharat Petroleum and Hindustan Petroleum saw LPG losses of Rs 4,100 crore, Rs 2,000 crore and Rs 2,500 crore, respectively.
This translates to a loss of Rs 600 to Rs 1,400 crore for the companies per month. Assuming the monthly loss run rate seen in the June quarter, the three major oil marketing companies could see an average LPG loss of Rs 11,400 crore in the current fiscal, if the government does not provide a one-time subsidy, as per NDTV Profit calculations.
Brokerage Views: Jefferies On TRAI Data, Emkay On Oil Firms, HSBC On Life Insurers And More
LPG Loss In September Quarter
Margins have contracted in the second quarter, according to two analysts who spoke to NDTV Profit on the condition of anonymity.
A key commodity to watch out for is propane, which acts as a feedstock or input cost in the LPG production process and thereby impact global LPG costs, which in the end impact the price at which India imports LPG.
After a sharp uptick in propane price in the first week of July 2024, propane price moderated to levels lower than June at the start of August. However spot prices in the month of August have increased. Furthermore, propane future prices have increased by $10 per million metric tonne in the current quarter, according to Nuvama Research.
Street Expectations
Emkay Research remains optimistic on oil companies receiving adequate LPG subsidy. If LPG losses continue to occur, the brokerage expects a subsidy similar to that received in quarter ended June 2022 by the end of this financial year.
Third quarter earnings of companies could see a boost if the government announces compensation for LPG losses by then, according to Citi.
