Indian Oil facing higher costs due to the rising crude oil

Higher fuel cost and working capital needs weighing on Indian Oil’s financials


Images From Around Cochin Port Ahead Of Trade Figures

India’s largest refiner, Indian Oil Corporation is grappling with higher working capital requirements and fuel costs due to the recent spike in crude oil.

Why is this important

  • Lower crude oil prices have helped refiners in reducing their borrowings. Indian Oil’s borrowings fell to Rs 32,000 crore at the beginning of 2018 from Rs 86,000 crore in March 2014.
  • From a low of $28 in January 2016, crude oil has risen 167% to ~$75 per barrel in 2018. Prices of refined products follow the global crude oil trend and Indian refiners align local prices with the international rates.
  • The company uses ~9% of the oil it buys as fuel at its refineries. Higher crude prices lead to company borrowing more in working capital.
  • According to the company, every $10/barrel rise in the price of crude oil raises the firm’s working capital cost by about Rs 500 crore/year and cost of fuel consumed internally by $0.9 per barrel.
Crude Price Trend
Crude Oil Price Trend

Stock to be impacted

During the polling season, Indian state refiners are not able to fully pass on the price hikes to the retail customers due to political pressures and with General Election coming up in 2019, it remains to be seen how the international crude oil prices move.

To counter these headwinds and get competitive rates, Indian Oil has been diversifying its import basket to reduce dependence on specific regions. The company has set up an office in Singapore to procure crude oil and so far has procured 8 million barrels of oil worth $500 million.

Indian Oil Corp (CMP: Rs. 164, Market Cap: Rs. 1,59,516 Crores, FY2020 EV/EBITDA: 6.2 )

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