OMCs' margins to take a hit post increase in taxes: Ind-Ra

Mumbai (Maharashtra) [India], May 9 : The recent hike in additional customs and excise duties on petrol and diesel will meaningfully affect profitability and leverage profile of the three public oil marketing companies (OMCs), according to India Ratings and Research.
These companies are IndianOil Corporation, Hindustan Petroleum Corporation and Bharat Petroleum Corporation.
The Rs 8 per litre raise in additional customs duty on petrol and diesel and the hike in special excise duty on petrol by Rs 2 per litre and on diesel by Rs 5 per litre have increased the total tax collection of the central government by Rs 10 per litre on petrol and Rs 13 per litre on diesel.
"The event also brings to light the fact that the government through indirect tools is still is able to control the marketing margins enjoyed by the OMCs," said Ind-Ra.
Though the government had passed a special provision for increase in additional customs duty and excise duty on March 23, Ind-Ra said it had expected the tax increase to be gradual rather than sudden.
The decision could be fallout of significant shortfall in government revenues as Goods and Services Tax (GST) and direct tax collections have also fallen short of target by 3.4 per cent and 12.2 per cent respectively.
A similar situation is visible at the state level and hence states will also look at petrol and diesel as a means to up their tax collections, like Delhi which increased the value added tax on petrol and diesel to 30 per cent from May 5 from 27 per cent and 16.75 per cent respectively.
"If this materialises without an increase in the retail price by the OMCs (the likely scenario), the hit on the marketing margins and profitability for the OMCs could be more. As on May 6, total taxes accounted for 69 per cent of total price of petrol and diesel in Delhi," said Ind-Ra.
The current increase of taxes has been carried out while ensuring that the retail price remains at the same levels. Thus, the OMC marketing margins are likely to take the entire hit of the increase in taxes.
Amid a weak demand environment owing to COVID-19, the impact of such reduction will lead to a significantly lower EBITDA in the marketing segment.
However, compared to the margin levels of Rs 3 to 5 per litre seen over FY19 and 9M FY20 (the current marketing margins), if sustained for the entire fiscal, could help in maintaining the marketing segment profitability even with the decline in volumes for FY21.