Published on 9/01/2018 4:53:21 PM | Source: Kotak Securities Ltd

Energy - 3QFY18E preview - expect a strong quarter - Kotak Sec

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3QFY18E preview—expect a strong quarter.

We expect energy sector companies to report robust operating profits in 3QFY18—(1) OMCs are expected to benefit from higher adventitious gains, which will be offset by lower refining and marketing margins, (2) RIL’s standalone performance will be boosted by higher petchem volumes, which will be offset by lower refining margins, (3) upstream PSUs will report sequentially strong EBITDA led by increase in global crude and domestic gas price and (4) gas sector companies will gain amid firm volumes and stable tariffs/margins

OMCs: adventitious gains to offset lower underlying refining and marketing margins

We expect downstream PSUs to report robust profits in 3QFY18, as sharply higher adventitious gains due to sustained increase in global crude oil prices through the quarter will adequately offset (1) lower underlying refining margins—Singapore complex margins declined US$1/bbl qoq to US$7.3/bbl and (2) steep reduction in marketing margins on auto fuels by `0.8-1.2/liter, largely attributed to the lack of increase in retail fuel prices during the state elections. We expect BPCL, HPCL and IOCL to report higher EPS of `14.9, `11.9 and `12.9 in 3QFY18 as compared to `12, `11.4 and `7.8 respectively in 2QFY18. We expect Castrol to deliver 19% yoy increase in net income to `1.78 bn (adjusted EPS of `1.8) led by 5.6% yoy growth in volumes and ~185 bps yoy improvement in EBITDA margins to 29.9%.

RIL: higher petchem to offset refining at standalone; lower IUC for Jio to boost overall results

We expect RIL to report 1% qoq increase in standalone EBITDA to `130.7 bn and 3% qoq increase in net income to `85.1 bn (EPS of `13.1), despite sequentially lower refining margins at US$11.6/bbl (-US$0.4/bbl qoq), which will be mitigated by an increase in petchem segment contribution due to higher volumes post commissioning of ROGC. We model RIL’s consolidated net income at `87.1 bn (EPS of `14.7) in 3QFY18, factoring in modest profit of `480 mn from Jio as compared to loss of `2.7 bn in 2QFY18 led by reduction in IUC costs, which will be offset by likely ‘accounting’ of higher operating costs.

Upstream: strong EBITDA driven by increase in global crude prices and domestic gas prices

We expect ONGC’s EBITDA to increase 17% qoq to `122.5 bn in 3QFY18 led by (1) increase in crude realizations by US$10/bbl qoq to US$61/bbl and (2) upward revision in domestic gas price by US$0.45/mn BTU to US$3.2/mn BTU; however, the increase in net income is expected to be modest at 3% qoq to `53 bn (EPS of `4.1) led by lower other income and higher tax rate. OIL’s EBITDA is similarly expected to increase by 29% qoq to `13.4 bn; however, there may be relatively modest increase net income by 11% qoq to `7.2 bn (EPS of `8.9) due to sequential decline in other income and increase in DD&A expense.

Gas sector: steady operating performance amid rising volumes and stable tariffs/margins

We expect GAIL to report modest 3% qoq increase in net income at `13.5 bn (EPS of `8), as (1) higher volumes for gas transmission and petchem segments and (2) higher realizations/margins for LPG and petchem segments, will be offset by sequentially lower other income. We expect PLNG to report modest 2% qoq decline in EBITDA, driven by modest reduction in LNG off-take volumes to 215 tn BTUs from 220 tn BTUs in 2QFY18, post start of Dabhol LNG terminal during 3QFY18; net income is expected to decline 7% qoq to `5.5 bn (EPS of `3.7) due to lower other income. We expect IGL and MGL to report sequentially steady EBITDA amid sustained pace of growth in volumes and stable unit EBITDA margins despite an increase in domestic gas price from October 1, which was passed on to the end-consumers.

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