Capex plans set to impact OMC profits
NEW DELHI: INDIA’s three state-run oil marketing companies (OMC) stand the risk of taking substantial hits to profitability over the near term due to a sharp increase in planned capital expenditure (capex) in a weak demand environment. Analysts note that Indian Oil Corporation Ltd (IOCL), Bharat Petroleum (BPCL) and Hindustan Petroleum (HPCL) intend to increase their spending on projects by a whopping Rs 1.1 lakh crore over the next five years compared to the previous half-decade.
The three OMCs have announced plans to invest a cumulative Rs 2.9 lakh crore between fiscal years 2020-24, against the Rs 1.8 lakh crore they spent between FY15-19. The sharp increase in capex is in line with the Centre’s recent diktat to central public sector enterprises (CPSE), with the finance ministry stating the ministry has held meeting with CPSE chiefs “in order to boost capital expenditure of the government and pump liquidity into the market to boost demand”.
With the country’s gross domestic product growth slowing for five consecutive quarters — from 8 per cent in Q1, FY19 to just 5 per cent in Q1, FY20 — the government intends to use increased public sector undertaking (PSU) capex as a tool to boost flagging growth. However, for the three PSU OMCs, this could mean increasing pressure on profitability and a rise in debt levels. The delays in payment of direct benefit transfer (DBT) subsidy dues from the government is also expected to exacerbate the pressure on profit margins.