2QFY18E preview—strong quarter across the board.
We expect energy sector companies to report robust profits in 2QFY18—(1) OMCs are expected to benefit from higher refining margins, increase in ‘implied’ marketing margins and adventitious gains, (2) RIL’s standalone performance will be boosted by strong refining and petchem profitability, (3) upstream PSUs will report higher EBITDA led by higher crude prices and growth in volumes and (4) gas sector companies will gain from higher volumes.
OMCs: higher refining and ‘implied’ marketing margins + adventitious gains to boost profits
We expect downstream PSUs to report sharply strong profits in 2QFY18, boosted by (1) higher underlying refining margins, (2) 50-60p/liter increase in ‘implied’ marketing margins on auto fuels, entirely attributed to timing difference between daily change in retail prices and fortnightly change in RTP and (3) adventitious gains due to uptick in crude prices, partially offset by weakness in petroleum volumes. We expect BPCL, HPCL and IOCL to report EPS of `14.9, `17.9 and `12.6 respectively, well above reported numbers in 1QFY18, which were impacted by significant adventitious/inventory losses and lower refining/marketing margins. Castrol is expected to report 7% yoy increase in net income to `1.5 bn (EPS of `3) led by 5% yoy growth in volumes and ~300 bps qoq improvement in EBITDA margins, assuming restoration of normalcy in distribution channels post GST implementation.
RIL: strong standalone profits; ‘accounting’ of Jio P&L should impact consolidated results
We expect RIL to report 14% qoq increase in standalone EBITDA to `132.6 bn and 13% qoq increase in net income to `92.2 bn (EPS of `14.2), driven by (1) expected increase in refining margins to US$13.2/bbl and (2) increase in petchem volumes. We model consolidated net income of `64.7 bn (EPS of `11) assuming `25.3 bn of loss from Jio; however, we would be watchful on ‘accounting’ of revenues and costs, which may depend on apportionment and capitalization. Incremental update on ramp-up schedule for downstream projects will be crucial.
Upstream: earnings boosted by higher crude prices and growth in volumes
We expect ONGC’s net income to increase 4% qoq to `40.3 bn (EPS of `3.1) in 2QFY18 led by (1) higher crude realizations reflecting movement in global crude prices and (2) sequential increase in gas and oil volumes. OIL’s EBITDA is similarly expected to increase by 3% qoq to `9.5 bn; however, net income may decline modestly by 2% qoq to `4.4 bn (EPS of `5.5) due to increase in DD&A and effective tax rate.
Gas sector: steady profits given modest rise in volumes and stable tariffs/margins
We expect GAIL to report 9% qoq increase in adjusted net income to `10 bn (EPS of `5.9) driven by increase in transmission and petchem volumes and higher other income, which will be partially offset by likely lower contribution from LPG and gas marketing segments. We expect PLNG to report 3% qoq increase in net income to `4.5 bn (EPS of `3), driven by modest increase in LNG off-take volumes. We expect IGL and MGL to report sequentially stable EPS at `12.9 (+1% qoq) and `12.9 (+3% qoq) respectively, driven by modest sequential increase in volumes and broadly steady unit EBITDA margins. We expect GSPL to report 11% qoq jump in EPS to ₹3, driven by 5% sequential increase in volumes.
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