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Q1FY22 Preview: High oil prices to drive upstream earnings

* Commodity prices continued their upward march on the back of global demand recovery, while India faced a second wave of lockdowns in Q1FY22. Benchmark GRMs rose to USD2/bbl+. OMCs hiked auto fuel prices aggressively though petrol margin was impacted.

* Average Brent price rose 13% qoq to USD68.6/bbl in Q1FY22, settling USD12.5/bbl+ higher at USD75.1/bbl. INR depreciated ~1% and settled Rs1/USD weaker. We estimate OMCs to see inventory gains and expect marketing volumes to grow on a low base.

* Upstream earnings would be driven by high crude realizations. GAIL’s petchem shutdown and lower gas volumes would however lower its earnings qoq. PLNG should see a volume decline in Dahej, while GSPL’s volumes are expected to be range-bound.

* CGD companies would see a qoq volume decline, though GGL should report better margins. We expect flat EBITDA for RIL qoq as weak retail would offset the increase in O2C earnings. We remain OW on BPCL, GAIL, IGL and ONGC.

OMCs to see inventory gains, weak core earnings; higher oil prices to drive upstream: OMCs are expected to see lower core GRMs qoq due to higher F&L cost and Middle East OSPs. Petrol marketing margin also plunged 50% to Rs1.5/ltr, though diesel was better. Additionally, HPCL and BPCL are likely to see some impact due to Mumbai expansion, Vizag outage and Kochi petchem hookup-led shutdowns. Volumes would be up yoy on a low base but would decline qoq due to the second wave. There would be some forex loss as well. We, hence, expect PAT of IOCL/BPCL/HPCL to decline qoq to Rs39bn/Rs16bn/Rs17bn in Q1FY22. We estimate PAT of ONGC/Oil India at Rs45bn/Rs3bn, driven by high oil realization. Total production of ONGC/OIL is expected to decline 2% each yoy. The quarter would see expenses decline based on the seasonal trend, but would be offset by low dividend income.

Gas sector to see second wave volume impact; GGL’s margins to improve: We estimate GAIL’s standalone PAT to decline 27% qoq to Rs13.9bn, driven by lower pipeline/trading volumes, higher gas costs and Pata shutdown (1.5 months), though partly offset by better US LNG margins. GSPL’s volumes should stay flat at 34.0mmscmd, while PAT should rise 3% qoq to Rs2.1bn. We estimate IGL’s PAT to fall 19% qoq to Rs2.7bn, assuming a 21% decline in volumes qoq, partly offset by 5% expansion in EBITDA/scm to Rs8.4. Gujarat Gas’ PAT would rise 5% qoq to Rs3.7bn on a 23% jump in EBITDA/scm to Rs6.3, partly offset by a 17% volume decline to 10.1mmscmd. For PLNG, we estimate PAT to decline 4% qoq to Rs6.0bn, with Dahej/Kochi utilization at 85%/27% and a spot margin of USD2.2/mmbtu.

RIL earnings to be range-bound; GOLI volumes to fall 10% qoq: We estimate RIL’s consolidated EBITDA to remain flat qoq at Rs235bn as an uptick in O2C income (driven by margins) would be offset by a sharp drop in Retail EBITDA (Rs24.7bn). For Jio, we expect ~5mn net subscriber additions and Rs137 ARPU. We estimate consolidated APAT post JPLRRVL minority interest to decline 18% qoq to Rs109bn. We assume an effective tax rate of 25.2%. Upstream earnings should improve. For GOLI, we expect a 10% qoq decline in volumes due to the second wave. EBITDA/ltr should decline 6% to Rs21.0 amid high base oil prices. We expect EBITDA/PAT of Rs666mn/Rs528mn. ONGC, Oil India and Gujarat Gas should lead the pack in terms of earnings recovery in Q1FY22

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