OMCs set to start FY21E with a bang in Q1
We estimate OMCs’ Q1FY21 EPS to be up 37-266% YoY driven by record auto fuel marketing margin, inventory gain and in case of BPCL and HPCL surge in GRM on a low base. Net auto fuel marketing margin is estimated at Rs6.1/l in Q1FY21E and Rs2/l in Q2FY21-TD. FY21E margin may be higher than our estimate of Rs2.5/l. OMCs’ Q1 GRM is estimated at US$4.3-6.9/bbl including gain from crude at discount to Dubai of US$3.4-3.6/bbl. However, GRM in Q2-TD is weak at US$3.0- 3.8/bbl (including inventory gain of US$0.7-0.8/bbl) due to shrinking of crude discounts. Core GRM may be weak in Q2 and FY21E, but that including inventory gain would be higher. OMCs’ FY21-TD product inventory gain is estimated at Rs11- 23bn. We reiterate BUY/ADD on OMCs. HPCL remains our top pick among OMCs.
* OMCs to start FY21 with a bang: We estimate Q1FY21E EPS of BPCL, HPCL and IOC to be up 239%, 266% and 37% YoY, respectively. The main earnings driver would be record net marketing margin of Rs6.11/l (up 3.3x YoY) and inventory gain of Rs5.5-8.5bn vs loss or smaller gain in Q1FY20. BPCL and HPCL’s GRM is estimated to be up 2.1-9.3x YoY at US$5.9-6.9/bbl boosted by discounts on crude (US$3.4-3.6/bbl) but that of IOC at US$4.3/bbl to be down 9% YoY. In Q1, crude inventory gain is estimated at US$0.6/bbl for both HPCL and BPCL, but loss of US$0.1/bbl for IOC; cost of opening crude inventory of OMCs being high at US$36-38/bbl meant big inventory loss for all in Apr’20. IOC was hit further by its larger crude inventory and lower utilsation than peers, while HPCL gained from its high utilisation. Sales volume fall is estimated at 26-28% YoY and BPCL and IOC’s throughput fall at 29-30% YoY. HPCL’s throughput is assumed to be flat YoY as it was up 6% YoY (IOC and BPCL’s down 36-41% YoY) in Apr-May’20.
* Upside to FY21E marketing margin; net margin at Rs5.78/l in FY21-TD & Rs2.1/l now: We estimate OMCs’ net auto fuel marketing margin at Rs6.11/l in Q1FY21E, Rs2.1/l on 8-Jul’20, Rs2/l in 1-8 Jul’20 and Rs5.78/l in FY21-TD. Rs9.2-11.5/l (13- 17%) hike in diesel and petrol retail price has helped net margins recover sharply after being in the red briefly in early-Jun’20. Upside to OMCs’ FY21E EPS would be 7-16% if net margin is Rs2.75-3/1 vs our estimate of Rs2.5/l.
* Jul’20-TD GRM hit by shrinking of crude discounts, but inventory gain may boost GRM: OMCs’ Q1FY21 GRM was boosted by crude discounts to Oman/Dubai of US$3.1-6.6/bbl. However, in Jul’20, all Middle Eastern crude premium/discounts are US$4.1-6.2bbl higher than in Q1. We estimate hit to OMCs’ Q2FY21-TD GRM from cut in discounts at US$3.3-3.5/bbl QoQ and OMCs’ GRM at spot prices at US$1.8-2.5/bbl. Aramco has raised crude pricing by US$1/bbl MoM for Aug’20, which will further hit OMCs’ GRM in Aug’20. However, OMCs’ Q2-TD GRM on RTP and including inventory gain (US$0.7-0.8/bbl) is higher at US$3.0-3.8/bbl. High cost of opening inventory capped gains in Q1, but use of low-priced crude bought in Q1 may mean inventory gain of US$1.0-5.4/bbl and GRM of US$3.3-7.8/bbl in Jul’20-TD. Downside to OMCs’ FY21E core GRM of US$4.0-4.5/bbl is not ruled out, but that including inventory gain would be in-line or higher.
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