Published on 11/07/2017 3:18:16 PM | Source: Kotak Securities Ltd

Power Sector Update OMCs weak profitability driven by low distillate spreads and inventory losses - Kotak Sec

Posted in Broking Firm Views - Sector Report| #Kotak Securities Ltd #Power Sector #Sector Report

1QFY18E preview—weak for OMCs and RIL; strong for CGDs.

We expect OMCs to report weak profitability driven by lower refining margins and inventory losses. RIL’s results are expected to be weak as well, further impacted by a reduction in light-heavy differential and appreciation in rupee against US dollar. Upstream PSUs will be impacted by lower crude prices and a stronger rupee, amid steady volumes. GAIL and PLNG are expected to report stable EBITDA sequentially. IGL and MGL will benefit from lower RM cost driven by appreciation in rupee, which was not passed on to consumers


OMCs: weak profitability driven by low distillate spreads and inventory losses

We expect downstream PSUs to report lower profitability in 1QFY18, being impacted by (1) lower spreads for key petroleum fuels, (2) adventitious/inventory losses due to correction in crude prices towards end of the quarter and (3) muted growth in volumes; we remain watchful of movement in fuel market share for OMCs. Modestly lower marketing margins on gasoline (-40p/liter qoq) will be partially offset by higher marketing margins on diesel (+10p/liter). We expect BPCL, HPCL and IOCL to report EPS of `8.8, `9 and `5.4 respectively, well below reported numbers in 4QFY17, which benefited from significant adventitious gains under rising crude price environment. We expect Castrol to report 13% yoy decline in net income to `1.8 bn (EPS of `3.6) led by 5% decline in volumes, assuming lower off-take by trade channels pre-GST in the month of June and sharp rise in base oil prices, partially offset by price hikes.


RIL: sequential decline in EBITDA due to lower realized refining margins and stronger rupee

We expect RIL to report 5% qoq decline in consolidated EBITDA to `116 bn and 11% qoq decline in net income to `71 bn (EPS of `24.1), driven by (1) lower realized refining spreads due to weaker product spreads, strength in fuel oil cracks, lower light-heavy differentials and partial shutdown of DHDS unit and (2) strength in rupee against US dollar, which will be offset by higher polyester margins. We assume refining margins at US$10.5/bbl versus US$11.5/bbl in 4QFY17 and 1QFY17. Ramp-up schedule for downstream projects and updates on telecom business will be key things to watch out for in the upcoming results and AGM.


Upstream: impacted by lower crude prices, lower other income and rupee appreciation

We expect ONGC’s adjusted net income to decline 20% qoq to `34.6 bn (EPS of `2.7) in 1QFY18 led by (1) lower crude realizations, (2) decrease in other income from previous quarter, which was boosted by high dividend receipts and (3) a stronger rupee. OIL’s adjusted net income will decline sharply by 55% qoq to `4 bn (EPS of `5) given a steep reduction in other income.


Gas sector: stable EBITDA for GAIL and PLNG; CGD companies to get a boost from rupee

We expect GAIL to report sequentially stable adjusted EBITDA as, higher profitability from (1) strength in LPG and petchem margins and (2) lower operating costs, will likely be offset by lower petchem production from planned shutdown at PATA plant. We expect PLNG to report sequentially steady EBITDA as modestly higher LNG off-take will be offset by lower realized tariffs; however, net income will decline 12% qoq to `4.2 bn (EPS of `2.8) due to normalization of effective tax rate. We expect IGL and MGL to report sharp jump in EPS to `13.1 (+31% qoq) and `11.2 (+11% qoq) driven by a sharp expansion in unit EBITDA margins, as lower cost of input gas in rupee terms, was not passed on to end-consumers in CNG and domestic PNG segment during the quarter; IGL’s profitability is further boosted by superior volume growth.

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