IGI Logo

Recent trends in downstream margins indicate a rapidly deteriorating demand scenario, with benchmark Singapore GRMs (SG GRMs) dipping sharply over the past few weeks. SG GRMs have declined to US$3.9/bbl levels over Apr’23 (last week’s average: US$2.8/bbl) and, as per our rough estimates, OMC GRMs for Apr’23 are averaging US$3.1-4.9/bbl. At the same time however, the decline in crude and product prices has helped petrol and diesel retail margins reach multiyear highs in the previous month, which largely offsets the margin hit from refining. We had earlier factored-in above-average GRMs and nominal marketing margins for petrol & diesel for FY24E, but recent trends can completely transform that ratio. While we leave our estimates unchanged for now, our workings on margins based on annualising the current month trends suggest that, despite widely divergent metrics for both refining (lower than estimates) and retail margins (well above estimates), overall gross margins for the OMCs are trending broadly at our base case levels. Reiterate BUY on all 3 names: IOCL, BPCL, HPCL.

Refining prospects have seen material softness: The lack of demand momentum in China as well as its higher refining export quotas, coupled with the sustained worries about economic growth across the US and Europe has impacted global refining margins adversely over the past 2 months. While global demand-supply trends over the medium term remain skewed in favour of demand, near-term concerns trump those metrics. We do believe that the current levels of product spread are unsustainable and will see normalisation over the next 6 months. However, in the meantime, refined earnings will likely remain under pressure for Indian refiners in H1FY24E

Marketing margins are in good health: With the refining business having seen material weakness, the resultant softness in product prices has been a boon for petrol and diesel retail margins. From a low of negative margin of Rs9.6/ltr for petrol and negative margin of Rs19.7/ltr for diesel (for Jul’22), marketing margins for both fuels improved to positive Rs7.0/ltr and Rs4.5/ltr respectively in March’23 and have further increased to Rs7.1/ltr (petrol) and Rs7.3/ltr (diesel) by last week of April’23. Keeping other margins at similar levels as earlier and annualising Apr’23 trends, blended marketing margins could be in range Rs5,900-8,500/t for FY24E vs negative Rs711-2,800/t in

Earnings for OMCs will see steady improvement: Despite the weakness being seen in downstream margins, overall earnings for the OMCs should show positive traction over FY24E-25E, given the impact of the low base, stronger marketing earnings and our sense that GRMs have bottomed out at the current levels. Our base case assumptions imply EPS CAGRs of 102% / 127% in IOCL / BPCL over FY23-25E. HPCL’s EPS also improves sharply from a negative Rs35.5/sh in FY23E to a positive Rs78.8 in FY25E. Valuations 5.3/6.9/2.9x PER (FY25E) clearly discount much more weakness than what is justified, underpinning our positive stance. Reiterate BUY on all 3 companies.

Key upside risks: i) Uptick in refined product spreads; ii) favourable pricing action on petrol and diesel; iii) stronger fuel consumption growth.

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://secure.icicidirect.com/Content/StaticData/Disclaimer.html
SEBI Registration number INZ000183631

Above views are of the author and not of the website kindly read disclaimer