InvestorQ : Why did IOCL report such a huge loss despite such healthy gross refining margins?
Anu Biswas made post

Why did IOCL report such a huge loss despite such healthy gross refining margins?

Ria Jain answered.
2 weeks ago

In a way, you are absolutely correct. The gross refining margins (GRMs) in the June quarter stood at a high of $31.8/bbl. Of course, the GRMs have now come down sharply from those levels, but it is still very high on an average for the last quarter. The problem was that IOCL took a deep hit on its marketing margins, which more than offset this advantage of GRMs. For instance, IOCL sold petrol at a loss of Rs10 per litre while it sold diesel at a loss of Rs14 a litre on an average in the June 2022 quarter. Now, you know where the problem is?

In a nutshell, the net loss reported by IOC in the June 2022 quarter can be largely attributed to the losses on marketing margins explained above. For the June 2022 quarter, this resulted in IOC reporting a net loss of Rs1,992.53 crore. This is against net profit of Rs5,941 crore in the Q1FY22 quarter and net profits of Rs6,022 crore in Q4FY22 quarter. Due to this intense pressure of the marketing margins getting into negative, IOC saw its standalone EBITDA fall by a whopping 88% to Rs1,359 crore. That triggered the losses in the quarter.

The loss on marketing margins was one side of the story. In addition, IOCL also incurred an inventory loss of Rs1,600 crore on account of excise duty reduction in the quarter. The negative marketing margins during the quarter more than offset the GRM gains for the quarter. You need to understand a small background as to why the marketing margins were negative. Normally, IOC, BPCL and HPCL revise the prices daily based on the shifting price of crude. However, that only works in the event of normal prices and not high prices.

Now look at the huge dichotomy that occurred in this case. The basket of crude oil that India imports averaged $109/bbl. At the same time, the retail pump rates were selling at prices aligned to crude at around $85/bbl. That is what caused the loss. You can imagine how this huge loss even ended up offsetting all the gross refining margin gains in the quarter. Ironically, this was the first loss reported by IOC in the last 2 year. In last few days, the GRMs are down to about $11.8/bbl but marketing margins improved due to lower crude prices.

Let us quickly understand the methodlogy of how this loss was calculated in the case of IOC. The general practice is that oil companies like IOC and BPCL calculate a refinery gate price based on import parity rates. In the event of the marketing division selling belowrefinery gate prices, it results in negative marketing margins to IOCL, BPCL and HPCL. In India, oil pricing decision are not just economically driven. Being sensitive to public sentiments and to inflation, the oil price decision is often a very political and social decision too.