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Covid-19 ears to the ground: Staring at 10-30% fuel demand hit
* Our channel checks with oil and gas marketing companies imply 5-10% disruption in initial sales volume from Covid-19 restrictions in India. However, the volume hit could deepen further in the next 7-10 days as the government clampdown intensifies. According to media reports, IOCL estimates a 10%-11% overall demand decline in March 2020, with diesel consumption falling over 13%, jet fuel by 10%, petrol by 2% and bunker fuel (FO) by 10%. CGD companies have stated that the initial hit will be 5-7% in Delhi and 7-8% in Mumbai. CNG and commercial PNG segments will be hit due to closures.
* Petrol pump dealers have projected an even grimmer picture, with an over 50% drop in fuel outlet throughput in Mumbai and possibly for other metros also in the next few days. Private vehicles are already off the road to a considerable extent, while autos/taxis are operating at reduced runs. The government is discouraging public transport. App-based cabs will also shut/reduce services. City bus routes have also been cut, which reduces kilometers run. Mumbai’s traffic fall has been more severe than that of Delhi, though a similar situation can be seen in most major cities in the next few days.
* Rural areas and smaller cities and towns have seen lesser impact due to lower traffic intensity. Volumes in these areas are down nevertheless. Petrol pump dealers have stated that the overall hit could be 25-30% across the country if the situation does not improve. Many pump owners have sought to lower outlet timings due to falling sales and for the safety of attendants.
* We believe that, in the next 7-10 days, the situation should become clearer on the extent of the demand destruction and the severity of Covid-19 in India. Our estimates show, against a 2% oil demand growth yoy built for the next year, if one-month volumes fall by 25%, the full-year demand would reduce to being flat. In case of CGD, against 10% growth estimates, if one month records 10% de-growth, full-year growth would come down to 8.5%. While the visibility is low, OMCs earnings would be more margin driven. Low oil prices give enough room for improving marketing margins, while GRMs, despite a weak near-term core scenario, would still benefit from lower fuel & loss costs, increased OSP discounts and expanding light/sweet-heavy/sour differentials. We remain positive on OMCs.
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