Indian Oil Corporation Ltd net profit falls 47% in Q1 as Covid-19 hit fuel demand, shrink refinery margins.

Indian Oil Corporation Ltd (IOC), the nation's biggest oil firm, on Friday reported a 47 percent drop in its June quarter net profit as coronavirus pandemic pummelled fuel demand and shrank refinery margins.

Standalone net profit in April-June at Rs 1,910.84 crore, or Rs 2.08 per share, was 46.8 percent lower than Rs 3,596.11 crore, or Rs 3.92 a share, net profit in the same period of the last financial year, IOC Chairman Shrikant Madhav Vaidya told reporters here.

"The variation in net profit is primarily due to inventory losses," he said.

The firm recorded an inventory loss of Rs 3,196 crore in Q1 as compared to inventory gain of Rs 2,362 crore a year back, he said.

Inventory loss is booked when a company buys raw material (crude oil in case of IOC) at a certain price but by the time it can process it into finished product (fuel in case of IOC), prices have fallen. Since prevailing international oil prices determine refinery gate prices, an inventory loss is recorded.

Inventory gain is booked if the reverse happens.

He said crude oil prices averaged $29.6 per barrel in the first quarter of the fiscal year beginning April 2020 as compared to $50.1 per barrel in the preceding quarter and $68.9 in Q1 in 2019-20.

Rates have crawled to $40 in July and are expected to stay around that level in the second half.

Vaidya said pandemic had hit demand, resulting in lower capacity utilisation at refineries.

Capacity utilisation at the company's refineries averaged 69 percent in the first quarter and had risen to 93 percent in July but subsequent lockdowns by states have lowered the capacity utilisation to 75 percent, he said.

"We won't get back to normal times in the near future" due to way pandemic was spreading, he said.

With a good part of the quarter being spent under lockdown where vehicular movement was sparse, IOC fuel sales fell 29 percent to 15.25 million tonnes.

He said petrol demand fell 36 percent to 2 million tonnes while diesel sales were down 35 percent at 6.5 million tonnes. With most airlines grounded, ATF sales fell 79 percent to 0.24 million tonnes. LPG sales however recorded a 15.7 percent rise due to the government's free cooking gas scheme for the poor.

Its refineries processed 25 percent less crude oil at 12.9 million tonnes in the first quarter of the 2020-21 fiscal.

IOC said it lost $1.98 on turning every barrel of crude oil into fuel in the April-June period. This compared to a gross refining margin of $4.69 a barrel in Q1 of 2019-20.

"The outbreak of coronavirus globally and in India has impacted businesses and economic activities in general. The spread of Covid-19, along with nationwide lockdown starting from March 25, 2020, has caused a serious threat to human lives and resulted in a reduction in global demand and disruption in the supply chain, which have forced the businesses to restrict or close the operations in the short term," IOC said in its earnings statement adding revenue fell due to nationwide lockdown.

Income from operations fell to Rs 88,936.54 crore in April-June from Rs 150,136.70 crore a year back.

"The company's sales during the month of April 2020 were impacted significantly by the nationwide lockdown and consequently capacity utilisation of the plants was lower. However, the same has come back close to normal levels by the month of June 2020," it said.

"The company is consistently valuing inventories at cost or net realisable value (NRV), whichever is lower and NRV is derived based on actual realization in the specified subsequent period," IOC said.

Vaidya said core GRM without accounting for inventory loss or gain was $4.27 per barrel in Q1 as compared to $2.27 per barrel margin a year back.