A mighty rupee to hurt oil firms’ earnings


Earnings of oil and gas exploration and refining companies may come under pressure following the rupee’s appreciation against the dollar. This is because most of these companies bill their customers in dollar terms. For instance, oil sold by ONGCBSE 0.46 %, Oil IndiaBSE 0.49 %, and Cairn India is benchmarked to international crude prices, which is denominated in dollar.

Similarly , petroleum products such as diesel, petrol, and aviation turbine fuel (ATF) sold by refineries, including RILBSE 1.01 %, and oil marketing companies (OMCs) such as IOCLBSE 3.50 %, BPCLBSE 1.88 % and HPCLBSE 1.34 % is priced in the dollar. Every Rs 2 appreciation in the rupee against the dollar may hit their projected earnings for the next two fiscals by 2-6%.

On the other side, earnings of the lubricant maker such as CastrolBSE 1.21 % and Gulf OilBSE 1.46 % and city gas distributors (CGD) such as IGLBSE 0.51 % and Mahanagar Gas may benefit as they will spend less to obtain raw materials priced in the dollar terms, while billing of their customer is in local currency .

Refining companies will be impacted as lower realisation on final petro leum products will depress their gross refining margins(GRM) -the difference between crude oil prices and the total value of petroleum products. The refining division of RIL constitutes nearly two-thirds of the total revenue and profit of the company .For OMCs, it contributes between 30% and 50% of the operating profit.The rupee’s appreciation is likely to lower RIL’s earnings per share (EPS) for FY18 and FY19 by 4-6%. The drop will be 2-4% for OMCs.

The impact will be partially offset by lower liabilities on the foreign currency loans for RIL and OMCs. The change in the foreign currency shortterm loans is reflected in the profit and loss account, while the change in the long-term foreign currency loans is reflected in the balance sheet. RIL and OMCs together have outstanding foreign loan liability of nearly Rs 1.5 lakh crore.