What is the reason that IOCL and HPCL have shown good growth in sales but compression in profits in the March 2022 quarter?

For the fourth quarter ended March 2022, IOCL and HPCL have announced results while BPCL results are expected to be announced on Wednesday, 25th May. In the case of HPCL and IOCL, there was a spike in sales revenues but a fall in the net profits. Going by the industry trend ,one can safely assume a similar trend for BPCL also. The question is why this dichotomy in valuations. Here are the reasons.

· In the case of the downstream oil market companies (OMCs), the top line growth in sales revenues has been largely driven by higher crude prices leading to an improvement in the gross refining margins (GRM) of refiners. That was the top line story.

· But why did the profits fall? The first reason was the petchem margins which fell sharply on the back of higher crude prices. On the one hand, OMCs gained from higher GRM and higher inventory translation gains. On the other hand, the petchem margins offset some of these top line gains.

· Perhaps, the biggest reason was the compression in marketing margins. OMCs pay market price for crude but sell at prices mandated by the state, at least during special periods like elections, crude spike etc. There was no price hike in petrol and diesel between November and March due to elections, leading to OMCs losing over $20/bbl.