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OMCs: Pain in FY20, but gain likely in FY21E
We estimate OMCs’ FY20E EPS to be down 73-89% YoY (cut by 47-81%) hit by inventory loss of Rs57-192bn due to the oil price collapse in Q4FY20. However, OMCs’ FY21E earnings outlook is good as: 1) net auto fuel marketing margin is at an extraordinarily high level of Rs12.59/l in Apr’20-TD and in FY21E may be Rs2.5- 3.0/l vs our estimate of Rs1.75/l, and 2) inventory gain is likely as oil price is likely to end FY21E at much higher levels than it began. Upside to OMCs’ FY21E EPS would be 14-34% at a net marketing margin of Rs2.5-3.0/l even if throughput and sales volume decline by 5% YoY due to lockdown. Volumes would have to decline by 13-23% YoY to nullify entire gains of net margin at Rs2.5-3/l. We reiterate BUY on OMCs. HPCL is our top pick as it gains most from marketing margin strength
* Cut OMCs’ FY20E EPS by 47-81%; down 73-89% YoY: Oil price fall by US$44/bbl in Q4FY20 is estimated to have led to inventory loss of Rs331bn for OMCs. It has meant cut in their FY20E EPS by 47-81% and it being down 73-89% YoY.
* Auto fuel net marketing margin at extraordinarily high level but steep fall in sales volume and throughput: Auto fuel net marketing margin is at Rs12.59/l in Apr’20-TD, but auto fuel sales volumes are down 70% as per press reports due to lockdown in India. Net margin adjusted for volume fall would still be Rs2.57/l. Refineries of IOC are operating at 50%, BPCL at 60% and that of HPCL at 80-100% utilisation rates. HPCL’s higher utilisation rate is due to the fact that it outsources 58- 62% of its auto fuel sales volume vs 26-33% by BPCL and 14-15% by IOC.
* Upside to FY21 EPS from higher than estimated marketing margin & inventory gain: We believe OMCs are being allowed to earn record net margins to make up for the huge inventory loss in Q4FY20E. Upside to FY21E net margin of Rs1.75/l (Rs1.83-2.22/l in FY19-20) appears imminent. Upside to OMCs’ FY21E EPS would be 14-34% at net margin of Rs2.5-3/l even if sales volumes and throughput decline by 5%. Net auto fuel marketing margin being just Rs0.25-0.31/l higher than base case would help make up hit to FY21E EPS of 5% YoY fall in sales volume and throughput. FY21E EPS may also be boosted by inventory gains (not in estimates) as oil price in end-FY21E is likely to be higher than in the beginning.
* HPCL top pick: HPCL is our top pick as it: 1) gains the most from strong auto fuel marketing margins, which we expect; 2) is least likely to be required to cut throughput; and 3) is least hit by any disappointment on GRM. Demand collapse due to lockdown of ~3bn of the world’s population may hit OMCs’ GRM (US$4.5- 5.5/bbl), but sharp global throughput cuts and low oil prices will support GRM.
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